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LIBRARY 

OF    THE 

UNIVERSITY  OF  CALIFORNIA. 

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Digitized  by  the  Internet  Archive 

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http://www.archive.org/details/commercefinanceOOpowerich 


Commerce  and  Finance 


Designed  as  a  Text  Book  for  Schools  and 
a  Volume  of  Business  Information 
for  the  General  Reader. 


By  O.  M.  POWERS 

Principal  of  the  Metropolitan  Business  College 
Author  of  The  Complete  Accountant,  Etc, 


CHICAGO: 
Powers  &  Lyons 


4 


CINERAL 


Copyrighted  1903 

BY 

POWERS    &    LYONS 


PREFACE 


As  a  consequence  of  the  diffusion  of  general  intelligence,  the 
improvement  in  means  of  transportation,  and  the  rapid  transmis- 
sion of  information,  the  business  world  of  to-day  is  more  highly 
organized,  its  interests  more  intimately  connected  and  interwoven, 
and  its  methods  more  complex  and  intricate  than  ever  before.  To 
meet  present  conditions  the  successful  business  man  of  to-day  must 
possess  a  broader  and  more  intelligent  view,  as  well  as  a  readier 
comprehension  of  all  those  problems  which  enter  into  business  life. 
He  must  be  conversant  in  a  degree  with  the  operations,  silent 
though  powerful,  going  on  about  him.  In  short,  he  must  be  better 
educated.  In  the  preparation  of  this  book  the  aim  has  been  to  bring 
together  a  mass  of  important  facts  and  information  of  a  business 
nature  not  found  in  books  generally,  or  not  found  in  concise,  tang- 
ible or  logical  form,  and  present  the  various  subjects  so  clearly 
that  the  ordinary  reader  or  student  may  readily  grasp  them. 

The  book  is  a  combination  of  history  and  economics.  It  relates 
to  both  the  past  and  present.  In  the  first  146  pages  of  the  book, 
embracing  a  history  of  commerce  and  of  banking,  a  foundation  is 
laid  for  the  proper  consideration  of  the  subjects  which  follow.  In 
dealing  with  historical  facts  we  have  aimed  to  show  why  commerce 
flowed  in  certain  channels  at  certain  times  and  the  influences  which 
have  affected  its  progress  and  development.  In  the  discussion  of 
the  various  subjects  which  follow,  the  aim  has  constantly  been  to 
reach  the  basic  principles  underlying  each,  to  discover  the  theories 
upon  which  business  is  done.  Necessarily  the  subjects  could  not  be 
treated  in  exhaustive  detail  in  a  work  of  this  size,  but  the  most 
important  features  are  set  forth,  and  a  basis  is  thus  furnished  for 

5    ^ 


6  PREFACE. 

those  who  wish  to  pursue  any  special  line  of  study  farther  into  its 
details  and  intricacies. 

The  author  gratefully  acknowledges  himself  indebted  for  valu- 
able assistance  and  suggestions  in  the  preparation  of  this  work  to 
Mr.  Fred  W.  Gookin,  formerly  cashier  of  the  Northwestern  National 
Bank  of  Chicago;  Mr.  F.  H.  Rawson,  Vice-President  Union  Trust 
Co.,  Chicago;  Mr.  H.  P.  Simonton,  Corporation  Attorney;  Mr.  C.  S. 
Pellet,  Ex-President  Chicago  Board  of  Underwriters;  Mr.  J.  H. 
Emerson,  General  Agent  New  Tork  Life  Ins.  Co.;  Mr.  Chas.  D. 
Snow,  of  the  Chicago  Board  of  Trade ;  Mr.  W.  E.  Ray,  of  the  Chicago 
Journal;  Mr.  B.  J.  Fitzgerald,  Real  Estate  Broker;  Mr.  John  F. 
Scanlan,  of  the  Custom  House;  Mr.  W.  A.  Douglass,  Manager  of 
R.  G.  Dun  &  Co.,  Chicago;  Mr.  John  E.  Gardin,  Manager  Foreign 
Exchange  Department  First  National  Bank,  Chicago,  and  many 
others,  and  yet  these  gentlemen  are  in  no  way  responsible  for  any 
possible  errors  or  inaccuracies  of  statement  that  may  appear  in  this 
book. 

O.  M.  P. 

Chicago,  September  1,  1903. 


CONTENTS 


HISTORY  OF  COMMERCE 

PAGE. 

I.  ANCIENT  COMMERCE. 

Origin  of  Commerce — Egyptians — Phoenicians— Greeks,     13 

II.  ANCIENT  COMMERCE— Continued. 

The  Carthaginians — The  Roman  Empire,   .....     19 

III.  MEDIEVAL  COMMERCE. 

Decline  and  Fall  of  Rome — ^Decay  of  Commerce — Con- 
fusion and  Ignorance  —  Charlemagne  —  Venetian  Com- 
merce,       27 

IV.  MEDIEVAL  COMMERCE— Continued. 

Decline  of  Venice — Commerce  of  Genoa,  Florence  and 
Pisa— Effect  of  Discovery  of  America, 36 

V.  MODERN  COMMERCE. 

The  Cape  Route  to  India — Portuguese  Commerce  — 
Spain's  Vast  Possessions  —  Expulsion  of  the  Moors- 
Dutch  Commerce, 46 

VI.  COMMERCE  OF  GERMANY. 

Hanseatic  League — Effect  of  Thirty  Years'  War — Revival 
of  German  Commerce — Zollverein — Present  Commerce,    56 

VII.  COMMERCE  OF  FRANCE. 

Flemish  Commerce  and  Manufactures — Age  of  Louis 
XIV — Colonial  Possessions — Revocation  of  the  Edict  of 
Nantes 64 

VIII.  COMMERCE  OF  FRANCE— Continued. 

Colbert  —  John  Law — The  French  Revolution  —  Napo- 
leon's Policy — Recent  French  Commerce,    ...     *     .     72 

IX.  COMMERCE  OF  ENGLAND. 

Before  the  Roman  Conquest — English  Wool  —  Eliza- 
beth's Policy — Carrying  Trade, 81 

7 


8  CONTENTS. 

X.  COMMERCE  OF  ENGLAND— Continued.  page. 

Manufacturing — Postal    System — Banking — Speculation 
—Colonial  Policy 93 

XI.  COMMERCE  OF  THE  UNITED  STATES. 

Colonial  Period— Financial  Policy— War  of  1812,     .     .  106 

XII.  COMMERCE  OF  THE  UNITED  STATES— Continued. 

Revival  of  Manufacturing — Tariff  Laws— Slavery — Civil 
War, 119 

XIII.  COMMERCE  OF  THE  UNITED  STATES— Continued. 

Growth  of  Industries  —  Inventions  and  Discoveries  — 
Foreign  Trade, 132 

MONEY. 

XIV.  NATURE  AND  USE  OF  MONEY. 

As  an  Element  in  Civilization — Kinds — Barter — Essen- 
tials of  Money,       .....* H7 

XV.  FUNCTIONS  AND  KINDS  OF  MONEY. 

Four  Functions — Subsidiary  Coin — Comparative  Value 
of  Silver  and  Gold — Demonetization  of  Silver,  etc,   •     .  153 

XVI.  THEORIES  OF  MONEY. 

Coinage — ^Volume  of  Money — Substitutes — Monometal- 
lism— Bi-Metallism, ...161 

HISTORY  OF  BANKING. 

XVII.  PRIMITIVE  BANKING. 

Bank  of  Venice  —  Amsterdam  Wisselbank  —  Bank  of 
France — French  System, 168 

XVIII.  ENGLISH  BANKING. 

Bank  of   England — Peel's  Act,   1844  — One  Reserve- 
Banking  and  Issue  Departments, 178 

XIX.  ENGLISH  MONEY  SYSTEM. 

Bank  of  England  —  Immense  Responsibility  as  Keeper 
of  the  Reserve — Bank  Rates — Management 187 

XX.  GERMAN  BANKING. 

Reichsbank — Elasticity  of  German  Currency — Stability 
— Russian  Banking 196 

XXI.  SCOTCH  AND  CANADIAN  BANKING. 

Scotch  System  —  Branch  Banks  —  Canadian   System — 
Asset  Banking — Elasticity .  204 


CONTENTS.  9 

XXII.  BANKING  IN  THE  UNITED  STATES.  page. 

Colonial  Period — Bank  of  North  America — Hamilton's 
Views— First  United  States  Bank— State  Banks,  .     .     .218 

XXIII.  BANKING  IN  THE  UNITED  STATES— Continued. 

Second  United  States  Bank— The  Great  Bank  War — 
Suffolk  Bank  System— Safety  Fund  System— Wild  Cat 
Banking, 225 

XXIV.  BANKING  IN  THE  UNITED  STATES— Continued. 

National  Banking  System  —  Organization  —  Reserve  — 
Circulation — Sub-Treasury  System 233 

XXV.  BANKING  IN  THE  UNITED  STATES— Continued. 

State  Banks —Private  Banks — Savings  Banks — Trust 
Companies 244 

XXVI.  BANKING  IN  THE  UNITED  STATES— Continued. 

The  United  States  Treasury 252 

BANK  CLEARING  HOUSE. 

XXVII.  SETTLEMENTS  BETWEEN  BANKS. 

History — Objects — Methods — Clearing  House  Certificates,  262 

BORROWING   AND    LENDING    MONEY. 

XXVIII.  THE  USE  OF  CREDIT. 

The  Money  Market  — Call  Loans — Collaterals  —  Note 
Brokers 271 

CORPORATIONS. 

XXIX.  CHARACTER  OF  CORPORATIONS. 

Formation — Promotion  —  Kinds  of  Stock —Watering 
Stock— Dividends 282 

XXX.  CORPORATIONS— Continued. 

Directors— Duties  of  Officers — By-Lavvrs— Records,     ,     .  293 

XXXI.  CORPORATIONS— Continued. 

Subsidiary  Corporations— Control  and  Manipulations,  .  300 

XXXII.  CORPORATIONS— Continued. 

Combinations — Trusts — Promotion — Underwriting,   .     .  305 

XXXIII.  CORPORATIONS— Continued. 

Receiverships — Reorganizations, 313 


10  CONTENTS. 

BONDS.  PAGE. 

XXXIV.  GOVERNMENT  AND  CORPORATE  OBLIGATIONS. 
Kinds— Refunding— Negotiating — ^Foreclosure,     .     .     .  319 

SECURITES  AND  INVESTMENTS. 

XXXV.  BONDS,  STOCKS  AND  MORTGAGES. 

Governments— State  and  Municipal — Kinds  of  Mortgage 
Securities,    .     .     .     .     • 328 

COMMERCIAL  CREDITS. 

XXXVI.  OUR  CREDIT  SYSTEM. 

Assets — ^Losses — ^Limit  of  Credit — Machinery  of  Credit,    336 

PURCHASE  AND  SALE  OF  REAL  ESTATE. 

XXXVII.  LANDED  PROPERTY. 

Titles — ^Values — Ninety-Nine  Year  Leases — ^Mortgages,    345 

FIRE  INSURANCE. 

XXXVIII.  INDEMNITY  FOR  LOSS  BY  FIRE. 

History — Classes  of  Companies — Risks — ^Rates,     .     .     .  354 

XXXIX.  FIRE  INSURANCE— Continued. 

Boards  of  Underwriters — Co-Insurance— Losses,  .     .     .  363 

LIFE    INSURANCE. 

XL.    INDEMNITY  AGAINST  MISFORTUNE. 

History  —  Methods  —  Kinds  of   Companies  —  Kinds   of 
Policies 370 

XLI.    LIFE  INSURANCE— Continued. 

Premiums  — Dividends  — Loans— Annuities— Assessment 
Insurance, 378 

THE   STOCK   EXCHANGE. 

XLH.    DEALING  IN  SECURITIES. 

Incomes  —  Investments  —  Speculation  —  Gambling  in 
Stocks, 384 

XLin.    THE  STOCK  EXCHANGE— Continued. 

Brokers — Bolls  and  Bears — Listing  Securities,      .     .     .  393 


CONTENTS.  11 

THE    PRODUCE    EXCHANGE.        page. 

XLIV.  BOARDS  OF  TRADE. 

Character— Organization — Members — Benefits  to  Public,  400 
XLV.    THE  PRODUCE  EXCHANGE— Continued. 

Cash  Grain — Futures — Inspection — Bucket  Shops,     .     .  407 

STORAGE  AND  WAREHOUSING. 

XLVI.     BONDED,  PRIVATE  AND  COLD  STORAGE  WARE- 
HOUSES. 
Importation  of  Goods— Classes  of  Bonded  Warehouses— 
Restrictions — Cold  Storage  System, 416 

TRANSPORTATION  BY  RAIL. 

XLVII.     RAILROADING. 

Railroad  Ownership  —  Capitalization  —  Traffic  Associa- 
tions—Pooling—Differential Rates,  Etc., 423 

XL VIII.    TRANSPORTATION  BY  RAIL— Continued. 

Classification  of  Freight — Freight  Rates — Cost  of  Serv- 
ice, Etc 432 

FOREIGN    COMMERCE 

XLIX.  TRADE  RELATIONS  WITH  FOREIGN  COUNTRIES. 
Duties— Reciprocity —  Bounties  —  Subsidies — Naval  Pro- 
tection  438 

L.    FOREIGN  COMMERCE— Continued. 

International  Law — Treaties — Consular  Service — Foreign 
Exchange, 445 

FOREIGN    EXCHANGE. 

LI.    INTERNATIONAL  SETTLEMENTS. 

Interchangeable  Values — Mint  Parity — Arbitrage — Gold 
Shipments, 452 

LII.    FOREIGN  EXCHANGE— Continued. 

Instruments  of  Exchange — Quotations — The  Arithmetic 
of  Exchange,    • 460 


HISTORY    OF    COMMERCE. 


CHAPTER  I. 

ANCIENT   COMMERCE. 

ORIGIN   OP   COMMERCE;   EGYPTIANS;   PHOENICIANS;   GREEKS. 

The  history  of  commerce  is  the  history  of  civilization.  In 
his  barbarous  state  man's  wants  are  few  and  simple,  limited  to 
his  physical  existence,  such  as  food,  clothing  and  shelter,  but 

as  he  advances  in  the  scale  of  intelligence  his  wants 
wa'nts"  increase  and  he  requires  not  only  the  comforts  and 

conveniences  of  life  but  even  the  luxuries.  Civil- 
ized man  is  never  satisfied,  for  no  sooner  is  a  want  supplied 
than  another  arises  in  its  place,  and  under  that  stimulus  he 
achieves  mighty  conquests  over  the  forces  of  nature  and  attains 
to  a  high  degree  of  development  in  character.  Commerce  is 
one  of  the  means  by  which  various  peoples  have  at  different 
times  undertaken  to  supply  their  needs. 

No  civilized  community  produces  all  the  things  which  it  con- 
sumes. A  portion  of  its  needs  must  be  supplied  by  an  inter- 
change of  products  with  other  communities  or  nations  and 
this  is  the  beginning  of  commerce,  either  domestic  or  foreign. 
Moreover,  it  may  be  impossible  for  a  nation  to  produce  all  that 
it  needs  to  consume,  owing  to  physical  peculiarities  of  the 
country,  its  lack  of  coal,  wood,  or  ore,  its  climate,  etc.     Thus 

England  cannot  grow  sufficient  corn  to  feed  its 
PureiS'"*  people,  but  it  manufacturers    more    cloth    than 

is  necessary  to  clothe  them.  A  warm  country 
cannot  grow  wheat  successfully,  but  it  may  produce  cotton  or 
rice  in  abundance. 

13 


14  HISTORY    OF    COMMERCE. 

Commerce  also  depends  in  a  measure  upon  the  national  skill 
of  a  people  in  the  manufacture  of  commodities.  The  Swiss  have 
long  been  noted  for  the  manufacture  of  clocks,  watches,  and  fine 

lace;  the  French  for  the  production  of  wine  and 
EmXyments       ^^^^'    -A-Hother  uatiou  may  be  deficient  in  both  the 

possession  of  natural  products  and  skill  as  manu- 
facturers, but  have  peculiar  skill  as  navigators,  and  become  the 
carriers  of  goods.  Such  were  the  Italian  cities  which,  in  the 
middle  ages,  grew  opulent  from  the  profits  of  the  carrying  trade. 
Then  again  a  nation  may  combine  all  three  of  these  functions, 
and  become  producers,  manufacturers  and  carriers  in  a  greater 
or  less  degree,  reaping  a  profit  from  each,  as  the  principal  nations 
of  Europe,  and  the  United  States  are  doing  at  the  present  time. 
The  ancient  commerce  of  the  world  was  carried  on  chiefly 
upon  the  shores  of  the  Mediterranean  Sea.  When  we  read  in 
Genesis  that  Joseph  was  sold  by  his  brethren  for  twenty  pieces 

of  silver  to  "a  company  of  Ishmaelites  come  from 
Egypt*'^*^'^  °        Gilead  with  their  camels  bearing  spicery  and  balm 

and  myrrh,  going  to  carry  it  down  to  Egypt,"  we 
get  a  glimpse  of  the  ancient  commerce  of  that  oldest  of  empires, 
Egypt,  drawing  supplies  from  the  thrifty  nations  to  the  east  of  the 
Mediterranean.  Caravans  of  camels  laden  with  goods  and  silver 
crossed  the  desert  and  carried  into  Egypt  wool,  ivory,  gold-dust, 
spices  and  slaves  from  Arabia  and  the  far  east.  In  exchange 
Egypt  furnished  large  quantities  of  wheat,  barley,  rice,  cotton 
and  flax  from  the  fertile  valley  of  the  Nile,  besides  quantities  of 
linen,  and  cotton  cloth,  as  well  as  utensils  and  pottery.  From 
the  nature  of  the  conditions,  Egypt  has  always  been  essentially 
an  agricultural  country.  The  broad,  level  valley  of  the  Nile, 
enriched  annually  by  the  overflow,  yielded  abundant  crops,  and 
the  people  were  apparently  content  with  their  harvests,  devoting 
themselves  but  little  to  manufacture  or  commerce.  The  sea 
coast  was  low,  with  no  good  harbors,  thus  uninviting  to  com- 
merce, while  a  scarcity  of  wood  made  ship-building  a  practical 


THE    PHOENICIANS.  16 

impossibility.  The  Egyptians  cultivated  the  arts  and  sciences, 
and  their  kings  busied  themselves  in  erecting  those  wonderful 
monuments  in  the  form  of  tombs,  which  still  remain  to  a  con- 
siderable extent.  Although  industrious  at  home,  they  did  not 
see^m  inclined  to  go  abroad  or  engage  in  foreign  trade,  and  this 
was  carried  on  chiefly  by  Arabs  and  Greeks.  After  the  con- 
quests of  Alexander  the  Great,  the  port  of  Alexandria  became  the 
great  commercial  metropolis  of  the  world,  and  Greek  merchants 
settled  there  in  large  numbers. 

The  first  navigators  and  carriers  of  goods  by  water,  of  which 
we  read,  were  the  Phoenicians  who  inhabited  the  narrow  strip 
of  coast  land  along  the  east  of  the  Mediterranean 
Phoenicians  ^^^'  Having  a  large  sea  frontage  with  little  inte- 
rior distance,  these  people  were  naturally  attracted 
to  seafaring  occupations.  Their  coast  abounded  in  good  har- 
bors, and  their  abundant  forests  supplied  the  materials  for  ship 
building,  while  agriculture  was  difl&cult  on  account  of  the  hilly 
and  rocky  nature  of  the  land.  Here  we  see  the  natural  con- 
ditions exactly  reversed  from  those  of  Egypt,  with  the  effect  of 
developing  a  nation  of  navigators  and  traders  instead  of  farm- 
ers, as  in  Egypt.  The  enterprise  and  activity  of  the  Phoenicians 
were  wonderful.  They  founded  the  cities  of  Tyre  and  Sidon 
and  built  up  a  large  and  profitable  system  of  commerce.  In- 
tellectual activity  and  diligence  in  business  led  these  people  to 
many  discoveries,  among  which  were  the  making  of  glass, 
the  art  of  dyeing  purple  and  writing  by  means  of  letters.  They 
were  also  distinguished  by  their  skill  in  casting  metals,  weaving, 
architecture  and  in  various  other  directions.  Sidonian  garments, 
Tyrian  purple,  Phoenician  glass  and  articles  of  ivory,  gold  and 
other  metals  were  precious  and  coveted  wares  in  all  antiquity. 
The  forests  of  Lebanon,  along  the  eastern  border,  supplied  them 
with  material  for  ship-building,  and  with  their  oared  barks  they 
navigated  the  coast  and  islands  of  the  sea,  trading  in  their  own 
productions  and  those  of  the  far  east,  spices,  frankincense,  oil. 


16  HISTORY    OF    COMMERCE. 

wine,  wheat  and  slaves.  They  made  their  way  along  the  coast, 
and  out  as  far  as  Cyprus,  where  they  founded  a  colony,  then  to 
the  islands  of  the  Aegean  Sea  and  Greece  to  the  north,  and  to 
Egypt  and  Africa  in  the  south.  They  ventured 
B.  c.  1050  west  as  far  as  Spain,  which  they  found  rich  in 

minerals,  especially  silver.  The  discovery  of  Spain 
with  its  rich  mines  brought  immense  wealth  to  the  Phoenicians, 
and  they  proceeded  to  develop  the  resources  of  the  country  with 
vigor.  It  is  said  that  the  Phoenicians  drew  such  vast  wealth 
from  the  mines  of  Spain  that  their  ships  carried  silver  anchors. 
Besides  silver  they  received  from  Spain  considerable  quantities 
of  tin,  lead,  iron  and  even  gold,  as  well  as  a  large  yield  of  wheat, 
wine,  oil,  wax,  fruit  and  fine  wool. 

The  Phoenicians  used  their  possessions  in  Spain  as  a  basis 
for  trading  voyages  farther  west.  They  passed  the  straits  of 
Gibraltar  and  went  northward  among  the  British  isles,  where 
they  obtained  large  quantities  of  tin.  Proceeding  still  farther, 
they  entered  the  Baltic  Sea,  and  visited  the  rude  people  in  north- 
western Europe,  purchasing  wool,  hides,  furs,  copper 
Voyage"^"  and  othcr  metals,  and  giving  in  exchange  their  own 

manufactures,  such  as  purple  dyed  robes,  carpets, 
and  fine  cloths,  works  in  gold,  silver,  ivory,  amber  and  glass. 
The  Phoenicians  imported  largely  raw  materials,  which  they 
made  up  in  Tyre  and  Sidon,  and  then  exported  the  finished 
product  either  by  their  own  ships  seaward  or  by  caravans  to  the 
east.  Thus  they  were  a  manufacturing  as  well  as  a  maritime 
nation.  They  are  said  to  have  rounded  the  Cape  of  Good  Hope 
on  voyages  to  India  about  the  year  B.  C.  600. 

This  enterprising  people  became  not  only  masters  of  the 
Mediterranean  Sea,  but  were  instrumental  in  scat- 
of  Civilization       tcriug  the  gcrms  of  taste  and  intelligence,  elevat- 
ing the  standard  of  civilization  and  establishing 
a  system  of  commerce  throughout  a  large  portion  of  the  an- 
cient civilized  world.     They  no  doubt  learned  the  use  of  gold 


THE    GREEKS.  17 

and  silver  as  money  from  the  Babylonians,  but  they  introduced 
and  popularized  the  use  of  these  metals  as  money  throughout  the 
Mediterranean  by  stamping  and  issuing  coins  of  both  metals  in 
various  sizes  and  denominations.  The  ratio  of  silver  to  gold  in 
value  at  that  time  was  about  13  to  1.  The  Phoenicians  also  in- 
troduced into  commerce  a  regular  system  of  weights  and  meas- 
ures, and  the  use  of  bills  of  exchange,  as  a  means  of  payment. 
But  owing  to  troublesome  wars  and  confusion  caused  by  the 
contests  between  the  Babylonian  and  Assyrian  empires  about  the 
eighth  century  B.  C.  the  commerce  of  Phoenicia 
The  Greeks  began  to  decline,  and  after  the  conquest  and  de- 

struction of  the  cities  by  the  Greeks  under  Alex- 
ander the  Great,  including  Tyre,  by  the  celebrated  siege  which 
lasted  seven  months  (B.  C.  332),  the  commerce  of  this  once 
energetic  people  passed  over  to  the  Greeks,  who  were  then  a 
dominant  nation  in  the  arts  and  sciences.  The  Greeks  were 
not  essentially  a  commercial  people,  being  more  devoted  to  art, 
architecture  and  literature,  nevertheless  they  had  observed  the 
methods  of  the  Phoenicians  and  became  their  competitors  to  a 
considerable  extent  in  commerce,  and  having  finally  conquered 
them,  inherited  their  trade.  The  Greeks  were  even  greater 
colonizers  than  the  Phoenicians,  and  established  flourishing 
cities  in  Asia  Minor  and  along  the  Black  Sea, 
inAsil"  *  many  of  which  not  only  became  important  mari- 

time but  manufacturing  cities  as  well.  Smyrna, 
founded  by  the  Greeks  at  that  time,  is  still  a  flourishing  em- 
porium, noted  principally  for  its  rugs.  These  cities  became  the 
centers  for  the  products  of  that  region,  such  as  cereals,  fish, 
timber,  salt,  leather,  wood,  skins  and  slaves.  Wheat  was  the 
most  important  product  and  came  chiefly  from  the  south  of 
Eussia,  as  it  does  at  the  present  time,  and  supplied  Athens  and 
Corinth  with  breadstuffs. 

The  Greeks  founded  several  colonies  in  Italy,  chiefly  in  the 
southern  portion.     They  took  possession  of  and  cultivated  the 


18  HISTORY    OF    COMMERCE. 

island  of  Sicily,  where  the  fertility  of  the  soil  proved  a  great 
attraction  to  settlers,  and  there  built  up  the  rich  and  powerful 

cities  of  Agrigentum  and  Syracuse.  These  cities 
hTitaiy"^^  exported  from   Sicily  large   quantities   of   wheat, 

fruit,  wine  and  oil,  and  conducted  an  extensive 
carrying  trade  with  Africa  and  Egypt.  From  Italy  the 
Greek  colonies  exported  wine  and  cattle  and  imported  articles  of 
Greek  manufacture,  such  as  pottery,  metal  wares  and  clothing. 
Most  of  the  Greek  colonies  in  Italy,  however,  gave  themselves 
up  to  a  life  of  pleasure,  luxury  and  ease,  and  thus  in  time  became 
an  easy  prey  to  the  more  sturdy  Eomans. 

Along  the  north   coast   of  Africa,  between   Carthage   and 
Egypt,  the  Greeks  established  a  number  of  settlements,  the  most 

important  of  which  was  Gyrene.  A  genial  and 
inAfrka  ^  healthful  climate,  combined  with  a  fertile  soil  to 

bring  prosperity,  and  Gyrene  carried  on  an  active 
trade  by  land  with  Egypt  and  the.  interior  of  Africa,  from  which 
it  derived  horses,  grain,  oil,  dates,  amethysts,  onyx  and  precious 
stones,  and  by  sea  with  Greece,  Italy  and  Asia  Minor,  exchang- 
ing these  products  for  cloth  and  wine.  As  before  stated,  Greek 
merchants  carried  on  most  of  the  commerce  of  Egypt,  both 
domestic  and  foreign. 


15"  Longitudt     \Q°      Wft        from      5°       Ureenwieh  0 


^*'        20°       from  ilreenwich         25° 


CHAPTER  II. 

ANCIENT    COMMERCE— Continued. 

THE  CARTHAGINIANS;  THE  ROMAN  EMPIRE. 

About  the  year  850  B.  C.  the  Phoenicians  had  founded  the 
city  of  Carthage  on  the  north  coast  of  Africa,  planting  there  a 
colony  which  was  destined  to  have  a  remarkable  career.  Tbe 
Commerce  ^^^^  ^^^  built  upou  a  pcuinsula  forty-five  miles 

of  the  around,  with  a  neck  only  three  miles  across.    The 

arthagmians  j^^^  along  the  adjacent  coast  was  fertile  and  well 
watered,  producing  wheat,  barley,  wine  and  oil  in  abundance. 
A  small  bay  in  the  gulf  of  Tunis  afforded  an  excellent  harbor 
for  the  city's  commerce.  Endowed  with  Phoenician  energy  and 
skill,  Carthage  soon  gained  great  wealth  and  power,  conquering 
a  portion  of  Sicily  and  the  northwest  coast  of  Africa,  thereby 
securing  complete  control  of  the  western  half  of  the  Mediter- 
ranean Sea. 

The  Carthaginians  founded  colonies  in  the  South  of  Spain, 
and  the  riches  of  the  Spanish  peninsula  were  poured  into  the  lap 
of  Carthage.  Her  ships  passed  the  strait  of  Gibraltar  and  con- 
tinued the  voyages  formerly  made  by  the  Phoenicians  to  the 
north.  They  also  turned  southward,  sailing  along  the  west 
coast  of  Africa  in  search  of  tropical  products.  They  sent  cara- 
vans into  the  interior  of  Africa  and  Persia  and  as  far  east  as  the 
Persian  Gulf.  Hither  were  brought  gold,  ivory,  slaves,  ostrich 
feathers,  ebony  and  dates,  and  in  exchange  the  Carthaginian  trad- 
ers exported  wheat,  meal,  wine,  ornaments  and  gaudy  clothes,  much 
the  same  as  worn  by  many  of  those  peoples  at  the  present  day. 

After  the  Persian  conquest,  many  of  the  merchant  princes  of 
Tyre  and  other  Phoenician  cities  emigrated  to  Carthage,  and 
thus  the  city  grew  in  wealth  and  commerce.    At  one  time  she 

19 


20  HISTORY    OF    COMMERCE. 

is  said  to  have  possessed  territory  having  a  sea  line  of  1,400 
miles  and  containing  300  cities.     In  the  silver  mines  of  Spain 

she  employed  not  less  than  40,000  men.  The 
ofca^thage^^^       Carthaginian  merchants  did  not  carry  for  hire, 

but  dealt  in  their  own  commodities,  thus  requiring 
an  extensive  system  of  warehouses  and  shipping  facilities.  They 
inaugurated  a  system  of  marine  insurance  and  made  loans  on 
bottomry.  It  has  been  supposed  that  their  leathern  money  was 
in  the  nature  of  bank  bills. 

Thus  we  see  that  Greece  controlled  the  commerce  of  the 
eastern  half  of  the  Mediterranean  Sea,  while  Carthage  dominated 
that  of  the  western  half.  Both  of  these  nations  reached  their 
golden  era  of  prosperity,  their  commercial  zenith,  about  three 
hundred  years  before  Christ;  both  declined  and  gave  way  to  a 
stronger  power  about  the  same  time,  and  to  the  same  power. 
While  these  nations  were  thus  dominating  the  commerce  of  the 
Mediterranean  there  was  growing  a  power  in  Italy  that  was  to 
conquer  and  supplant  them  both.  Like  the  sturdy  tree  which 
grows  slowly  that  it  may  knit  its  fibers  closely,  Rome  required 
five  hundred  years  before  she  was  sufficiently  strong  to  wrest 
the  commercial  and  political  supremacy  of  the  Mediterranean 
from  Greece  and  Carthage.  She  was  founded  about  750  B.  C. 
and  began  her  conquest  against  Carthage  and  Greece  about 
250  B.  C. 

The  dividing  line  between  Greece  and  Carthage  seemed  to 
bisect  the  island  of  Sicily.  The  western  half  belonged  to  Car- 
thage and  the  eastern  half  to  Greece.     Carthage  attempted  the 

conquest  of  the  eastern  half  of  the  island.  This 
IfCarth^*^         led  to  a  desperate  struggle  with  Syracuse  and  the 

Greek  colonies.  Then  Eome  and  Carthage  began 
a  contest  which  lasted  with  varying  results  for  over  a  hundred 
years.  It  was  in  many  respects  the  most  determined  and  relent- 
less warfare  ever  waged,  and  both  parties  seemed  to  realize  that 
it  was  a  fight  to  the  finish,  and  must  result  in  the  extermination 


CARTHAGE.  21 

of  the  one  power  or  the  other.  The  First  Punic  War  lasted  from 
264  to  241  B.  C,  when  Carthage  was  defeated  and  compelled 
to  give  up  Sicily,  Sardinia  and  Corsica.  After  twenty-three 
years,  war  was  again  declared  between  these  two  inveterate 
enemies,  and  in  218  B.  C,  Hannibal,  the  great  Carthaginian 
general,  led  an  army  by  way  of  Spain  over  the  Alps  into  Italy, 
and  at  one  time  it  seemed  as  if  Rome  would  be  completely 
crushed  beneath  his  mighty  blows.  But  the  tide  of  war  turned 
again,  and  the  Carthaginians  were  defeated  and  made  a  de- 
pendent province  of  Rome.  Finally,  in  the  Third  Punic  War, 
B.  C.  149,  the  Romans  utterly  destroyed  the  city  of  Carthage, 
carrying  its  inhabitants  who  survived  the  siege  into  captivity, 
burning  its  houses  and  demolishing  its  temples.  Not  content 
with  even  this,  they  plowed  the  land  where  Carthage  had  stood, 
sowed  it  in  salt,  thus  making  it  utterly  barren,  and  then 
pronounced  a  curse  upon  any  one  who  should  attempt  to  rebuild 
the  city.  Could  revenge  be  deeper  of  more  complete?  Un- 
fortunately, for  us,  they  also  destroyed  the  libraries  and  records 
of  this  remarkable  people,  so  that  all  we  know  of  them  has  come 
down  to  us  through  their  enemies.  We  are  told  that  Carthage 
was  a  city  twenty  miles  in  circumference,  and  contained  not  less 
than  one  million  inhabitants.  The  land  about  the  city  was  laid 
out  like  a  vast  garden,  and  embellished  with  innumerable  mag- 
nificent villas. 

In  the  same  year,  Corinth,  one  of  the  greatest  of  the  Greek 
capitals  and  seaports,  was  captured,  plundered  of  vast  wealth 
and  given  to  the  flames  by  the  Romans.  Athens  and  her  mag- 
nificent harbor  of  Piraeus  fell  into  the  same  hands  sixty  years 
later,  and  thus  the  seat  of  commercial  greatness  moved  westward 
to  the  banks  of  the  Tiber. 

The  Romans  were  naturally  statesmen  and  warriors  rather 
than  merchants.  They  were  better  adapted  to  govern  than  to 
trade  or  work.  With  Roman  supremacy,  set  in  an  era  of  growth 
and  activity  in  trade  and  commerce  throughout  the  then  civil- 


33  HISTORY    OF    COMMERCE. 

ized  world,  which  lasted  five  hundred  years.     The  effect  of 
Roman  domination  was  to  put  an  end  to  all  the  little  wars  that 
had  heen  previously  waged  among  adjacent  peo- 
su"emac  P^^^"     "^^  becoming   Roman   provinces   they  ex- 

changed their  independence  for  peace,  and  peace 
with  unrestricted  commerce  fostered  trade  in  all  parts  of  the  em- 
pire. The  Mediterranean  nations  were  brought  closer  to  each 
other,  both  politically  and  commercially,  and  became  common  in- 
heritors of  such  knowledge  as  was  then  in  the  world.  Arts,  sciences, 
improved  agriculture  and  manufactures  spread  among  them.  The 
city  of  Rome  became  the  center  of  the  system,  and  from  one 
quarter  wheat  had  to  be  brought,  from  another  clothing,  from 
another  luxuries,  and  Rome  had  to  pay  for  it  all  in  coin.  She 
had  nothing  to  export  in  return.  How  could  she  continue  to 
pay  out  coin?  The  coin  was  continually  flowing  into  her  treas- 
ury, as  tribute  from  all  of  her  numerous  provinces,  and  then  it 
found  its  way  back  again  to  the  provinces  in  payment  for  mer- 
chandise. By  this  there  was  a  tendency  to  an  equalization  of 
wealth  in  all  parts  of  the  empire,  and  a  perpetual  movement  of 
money. 

Rome,  in  its  golden  era  of  the  Emperor  Augustus,  had  a 
population  of  1,800,000  people,  besides  its  numerous  suburbs, 
and  to  supply  the  needs  of  this  vast  population  required  a  large 
number  of  merchants  and  tradesmen.  Besides  these,  extensive 
industries  were  carried  on  by  skilled  labor  to  sup- 
Romr'"  °*  ply  t^e  demands  of  the  rich  and  idle  class.  Plu- 
tarch tells  us  that  there  were  trade-guilds  in  wood- 
carving,  moulding,  dyeing,  lace-making,  cabinet-making,  and 
among  workers  in  bronze,  stucco  and  gold.  There  were  extensive 
establishments  for  the  manufacture  of  glass  and  pottery,  both  in 
Rome  and  other  Italian  cities.  Cloth  and  clothing  were  made  by 
the  weavers  of  Rome  in  large  quantities,  the  wool  coming  prin- 
cipally from  Spain  and  the  cotton  from  Egypt.  The  arts  of 
paper-making  and  book-binding  were  carried  to  a  much  higher 


ROME.  23 

degree  of  perfection  than  ever  before,  and  in  all  the  great  abbeys 
and  museums  there  was  an  apartment — the  Scriptorium — for  the 
copying  and  making  of  books. 

In  order  to  facilitate  their  military  operations,  the  Romans 

^      built  an  extensive  system  of  highways,  the  finest  the  world  had 

ever  seen.    Beginning  at  the  Golden  Milestone,  which  was  placed 

in  the  Forum  by  Augustus  to  mark  the  central 
Roman  Roads       point  of  the   Roman   Empire,   and   from  which 

distances  were  calculated,  these  roads  extended  in 
a  network  in  all  directions  over  Italy,  and  reached  as  far  as 
France,  Spain  and  Britain  in  the  west.  In  Greece,  the  moun- 
tains of  Epirus  and  Macedon  were  pierced  with  a  great  highway, 
and  in  Asia  Minor,  Palestine  and  North  Africa  they  built  roads 
leading  to  the  principal  seaports.  These  Roman  roads  were 
built  with  a  view  to  permanency,  and  many  of  them  remain  as 
important  and  useful  highways  of  commerce  to  this  day.  Won- 
derful examples  of  engineering  skill  are  frequently  exhibited 
in  their  construction,  being  in  some  instances  hewn  out  of  the 
mountain  side  and  in  others  composed  of  heavy  stone  viaducts 
and  bridges  which  still  remain  to  attest  the  skill  of  the  builders. 
These  roads  were  as  useful  to  Rome  as  railroads  are  to  us.  They 
were  furnished  with  milestones  and  post  houses  kept  in  perfect 
order.  A  regular  system  of  posts  was  established  so  that  the 
Emperor  might  have  speedy  information  of  events  happening 
in  the  different  provinces.  The  postmen  traveled  according  to 
regular  time  tables,  changing  horses  at  each  relay,  the  same  as 
in  this  country  before  the  advent  of  railways.  Although  built 
primarily  for  military  purposes,  so  that  troops  could  be  con- 
veyed readily  to  any  part  of  the  Empire,  yet  these  roads  and  the 
post  system  were  highly  instrumental  in  fostering  and  develop- 
ing commerce  as  well  as  civilization  in  general. 

We  will  now  take  up  the  consideration  of  the  Eastern  prov- 
inces of  Rome,  and  by  these  we  mean  Greece  and  the  Greek 
Islands,  Asia  Minor,  Phoenicia,  Palestine,  Egypt  and  the  north 


24  HISTORY    OF    COMMERCE. 

coast  of  Africa.  These  provinces  were  all  placed  in  immediate 
and  direct  communication,  not  only  with  each  other,  but  with 
Eome,  and  the  laws  were  so  framed  as  to  protect  intercourse  and 
Roman  Com-  commcrcc  generally,  but  especially  with  the  seat 
Eastern"  ^'^"^  of  government.  Greece  had  become  considerably 
Provinces  rcduccd  in   population,   especially   in   her   island 

colonies,  and  agriculture  declined.  The  result  was  that  large 
areas  were  now  given  to  grazing  and  the  raising  of  sheep  and 
horses.  This  supplied  wool  for  cloth  and  horses  for  the  Eoman 
army  and  for  the  chariots  and  other  vehicles.  Athens  supplied 
Rome  with  statuary,  cloth  and  perfumery,  Corinth  with  bronze, 
and  Paros  with  the  finest  of  marble.  Asia  Minor  and  ports  of 
the  Black  Sea  carried  on  an  extensive  trade  and  manufacture, 
supplying  Rome  with  cloths  of  superior  texture,  carpets,  works 
of  art  in  marble,  bronze,  gold  and  silver.  Through  these  cities, 
too,  came  a  large  portion  of  Roman  imports  from  the  far  East — 
Persia,  India  and  China — slaves,  precious  stones,  silks  and  per- 
fumes. From  Syria  and  Phoenicia  came  rugs,  glass,  pottery, 
purple  dyes,  cedar-wood  and  woodenware.  Egypt  sent  to  Rome, 
through  its  commercial  metropolis,  Alexandria,  immense  quanti- 
ties of  wheat,  barlej^  cloth  and  colored  glass.  It  also  forwarded 
the  slaves,  ivory  and  ostrich  feathers  of  Africa;  perfumes,  in- 
cense, gold  and  horses  from  Arabia;  spices,  cinnamon,  ginger, 
myrrh,  precious  stones,  pearls  and  silk  from  India.  Large 
quantities  of  grain  came  from  the  north  coast  of  Africa,  where 
the  Carthaginians  had  formerly  cultivated  the  rich  soil,  and  wild 
beasts  from  the  desert  farther  south  supplied  the  Roman  arena. 
The  western  provinces  of  Rome  were  also  very  prolific. 
Spain  was  the  richest  province.  Her  mines  yielded  fabulous 
Western  amouuts  of  gold  and  silver,  as  they  had  previously 

Commerce  of        douc  foT  the  Phoenicians  and  Carthaginians,  be- 
°"^*  sides  large  quantities  of  iron  and  copper.     Spain 

also  produced  an  abundance  of  wool  of  a  superior  quality,  besides 
wheat,  oil,  fruit,  honey,  wine,  dyes,  pitch,  salt  and  horses.    From 


ROMAN    SLAVERY.  25 

France  came  wine,  oil,  wheat,  millet,  honey  and  cattle.  The 
rivers  of  France  flowed  chiefly  in  the  direction  which  aided  in 
transporting  products  to  Rome,  and  these,  supplemented  by  the 
^  excellent  highways  built  by  the  Eomans,  facilitated  commerce. 
Marseilles  was  then,  as  it  is  now,  the  principal  port  of  shipment 
from  southern  France.  The  products  of  the  British  isles  were 
conveyed  to  Rome  partly  by  ships  which  rounded  Gibraltar  and 
partly  by  overland  routes  through  France.  These  products  con- 
sisted of  tin  and  iron,  cattle,  leather,  pearls,  oysters,  slaves,  jet, 
and  far-famed  hunting  dogs.  The  mountaineers  of  northern 
Italy  and  the  Alps  sent  resin,  pitch,  honey  and  wax,  while  Sicily 
on  the  south  sent  cattle,  wool,  honey,  wine  and  valuable  cloths, 
made  chiefly  at  Malta,  whose  weavers  were  far-famed  for  their 
skill. 

In  commenting  upon  the  commerce  of  Ancient  Rome  we  must 
remember  that  nearly  all  of  the  labor  of  the  Empire  was  per- 
formed by  slaves.  It  had  been  the  custom  from  remote  antiquity 
for  the  conqueror  in  war  to  carry  off  those  whom  he  had  spared, 
and  compel  them  to  cultivate  his  fields  and  otherwise  serve  him 
as  slaves.  Many  ancient  wars  were  instigated  and 
Slavery  conductcd  for  the  purpose  of  supplying  the  de- 

mand for  labor.  Rome  was  no  exception  to  this 
rule.  Livy  and  Plutarch  tell  us  that  when  Sicily  and  Greece 
were  subjugated  by  Rome  portions  of  them  were  depopulated. 
At  the  conquest  of  Epirus  by  the  Roman  general,  Paulus  Aemil- 
ius,  150,000  persons  were  either  murdered  or  carried  away  into 
slavery,  and  at  the  destruction  of  Carthage  50,000  persons  were 
carried  into  Roman  slavery.  At  the  taking  of  Thebes  large 
numbers  were  thus  disposed  of,  and  these  not  the  lower  but  of 
the  well-to-do  and  respectable  classes.  To  these  slaves  the 
laws  of  Rome  were  villainously  unjust.  A  slave  could  be  mur- 
dered on  the  slightest  provocation,  or  forced  into  the  arena  to 
contend  with  wild  beasts  for  the  entertainment  of  the  people. 
One  statute  provided  that  in  case  a  slave  owner  was  murdered, 


26  HISTORY    OF    COMMERCE. 

not  only  all  of  the  slaves  within  his  house,  but  even  those  within 
a  circle  supposed  to  be  measured  by  the  reach  of  his  voice, 
should  be  put  to  death.  Such  laws  show  the  small  value  placed 
upon  the  lives  of  these  unfortunates,  and  the  facility  with  which 
they  could  be  replaced.  The  great  number  of  slaves  necessitated 
a  vast  military  system  to  control  them.  Now  and  then  they 
arose  in  insurrection,  but  usually  paid  the  severest  penalty  as  a 
result.  All  kinds  of  labor  were  assigned  to  the  slaves  and  regarded 
as  contemptible  by  the  Romans.  Slaves  tilled  the  soil,  rowed 
the  galleys  and  performed  the  work  of  manufactures.  The 
carpenters,  masons,  weavers,  and,  to  a  considerable  extent,  the 
copyists  of  books  were  slaves.  Eich  men  owned  large  numbers 
of  them,  the  price  of  a  slave  being,  in  the  public  market,  only 
equivalent  to  $25  of  our  currency.  Slave  labor  was  actually 
cheaper  than  animal  labor,  so  that  much  of  the  work  which  we 
assign  to  horses  and  cattle  was  performed  by  men.  The  result 
of  this  was  to  debase  labor  and  destroy  that  class  of  intelligent, 
sturdy  and  independent  workmen  and  artisans  in  which  the 
strength  of  a  nation  chiefly  rests.  Although  commerce  flour- 
ished for  a  time  under  the  Roman  empire,  it  had  beneath  it  this 
system  of  injustice  and  inhumanity,  and  could  not  be  permanent. 
It  flourished  principally  because  of  the  vigorous  system  of  gov- 
ernment established  by  the  Romans,  better  roads  and  means  of 
intercourse  between  different  countries  and  provinces,  and  better 
protection  against  pirates.  Thus  we  see  the  influence  of  govern- 
ment upon  commerce. 


J 


Jrom        25        Urcenwieh 


CHAPTER  III. 

MEDIEVAL  COMMERCE. 

DECLINE  AND  FALL  OP  ROME;  DECAY  OP  COMMERCE;  CONPUSION 
AND  IGNORANCE;  CHARLEMAGNE;  VENETIAN  COMMERCE. 

About  the  middle  of  the  fourth  century  the  Roman  power 
began  to  decline.  It  had  held  unbounded  sway  over  an  immense 
empire  for  five  hundred  years,  and  had  created  a  high  degree 

of  civilization  and  an  extensive  commerce  among 
Commerce  °*       ^^^  ^^  ^^^  diversified  provinces,  but  riches  finally 

brought  luxury  and  corruption,  internal  dissen- 
sions weakened  the  state,  and  wars,  with  bad  government,  de- 
stroyed, in  a  large  measure,  the  commerce  of  the  empire. 
Excessive  taxation  and  extortion  seriously  crippled  the  pros- 
perity of  the  provinces.  Thus  Brutus  made  Asia  Minor  pay  five 
years'  tribute  at  once,  and  shortly  after  Anthony  compelled  it 
to  do  the  same  thing  again.  To  bolster  up  the  failing  revenues 
of  the  state  and  supply  needed  money  for  the  extravagance  and 
profligacy  of  Rome,  the  coinage  was  debased  by  reducing  its 
weight  and  increasing  the  alloy.  Thus  under  Vespasian  the 
silver  coin  consisted  of  one-fourth  copper  and  three-fourths  pure 
silver.  This  was  later  reduced  to  one-third  copper  and  two- 
thirds  silver,  then  to  one-half  copper,  and  finally  the  coin  of  the 
realm  contained  but  about  one  per  cent,  of  silver,  tin  being  sub- 
stituted. From  such  debasement  of  the  coin  it  was  only  a  short 
step  to  the  repudiation  of  debts,  and  this  step  was  often  at- 
tempted by  the  demagogues.  Law  ceased  to  have  any  value. 
A  suitor  must  deposit  a  bribe  before  a  trial  could  be  had.  The 
increase  of  immorality  proceeded.  The  virtues  which  had 
adorned  the  earlier  history  of  Rome  disappeared,  and  in  the 
end  were  replaced  by  crimes  such  as  the  world  had  never  before 
witnessed. 

27 


28  HISTORY    OF    COMMERCE. 

To  the  north  of  the  Roman  Empire,  occupying  what  is  now 
France,  Austria,  Germany  and  Russia,  had  grown  up  powerful, 
semi-barbarous  tribes  of  sturdy  hunters  and  warriors.  These 
"barbarians,"  as  they  are  called,  were  of  immense  stature, 
dressed  mostly  in  skins,  were  well  mounted  on  a  superior  breed 

of  horses,  and  used  the  customary  shields,  helmets 
Barirarians***^       and  othcr  implements  of  war.     They  had  some 

semblance  of  laws,  but  paid  no  taxes,  and  their 
civilization  and  commerce  were  of  the  rudest  character.  These 
rugged  tribes,  known  as  the  Goths,  Vandals,  Franks,  and  by 
other  names,  had  given  the  Romans  trouble  along  the  border  all 
through  the  second  and  third  centuries,  and  frequent  expeditions 
had  been  sent  out  to  quiet  or  subdue  them.  They  had  been 
students  of  Roman  discipline  and  methods  of  warfare,  and  some 
of  them  had  even  enlisted  in  the  Roman  army  for  this  purpose, 
and  thus,  as  the  power  and  internal  strength  and  prosperity  of 
Rome  began  to  decline,  these  hardy  peoples,  which  had  not  been 
enervated  by  luxury,  were  in  a  condition  to  dispute  Roman 
supremacy.  The  Roman  Empire  had  been  divided  in  the  year 
364  into  two  parts,  with  two  capitals,  viz.:  Rome  and  Constanti- 
nople, and  this  separation  divided  its  strength  and  made  it  all 
the  more  liable  to  defeat. 

Now  it  happened  about  this  time,  viz.,  the  fourth  cen- 
tury, that  vast  hordes  of  Huns  and  other  tribes  from  the  north- 
ern parts  of  Asia,  now  Siberia,  swept  over  into  Europe,  driving 
the  Goths  and  other  European  tribes  before  them  and  stirring 
up  general  confusion.  The  reason  for  this  migration  of  the 
Huns  is  supposed  to  have  been  a  gradual  upheaval  of  the  plains 
of  Siberia,  which  geologists  tell  us  actually  occurred,  thereby 

causing  the  rivers  to  run  dry,  and  forcing  the 
Rome*  °  Huns   to   movc   westward  with   their   herds   and 

flock§  in  search  of  better  pastures.  A  large  num- 
ber of  the  Goths  were  forced  over  the  Danube  and  settled  within 
the  boundaries  of  the  Roman  Empire.  They  had  their  own  king, 


CONFUSION    AND    IGNORANCE.  29 

and  this  led  to  a  conflict  with  Kome,  the  result  of  which  was  that 
Alaric,  king  of  the  Goths,  in  410  penetrated  into  Italy  and 
marched,  despite  all  oppositions,  to  the  very  gates  of  the  Eternal 
City.  It  had  been  over  six  hundred  years  since  Kome  had  felt 
the  presence  of  a  foreign  enemy  at  her  door,  and  that  was  Han- 
nibal, the  Carthaginian.  Alaric  laid  siege,  captured  and  sacked 
the  city.  His  successor  made  inroads  into  what  is  now  France 
and  Spain,  and  set  up  a  Gothic  kingdom  there,  while  other 
tribes  made  similar  incursions  into  Greece,  and  at  the  same  time, 
too,  still  other  Teutonic  tribes,  the  Angles  and  the  Saxons,  were 
settling  in  Britain  and  laying  the  foundation  for  an  Anglo-Saxon 
civilization.  Later  the  Saracens  conquered  the  eastern  and 
African  provinces  of  Rome  and  established  themselves  in  Spain, 
where  they  remained  for  several  centuries. 

These  great  waves  of  migration  which  passed  over  Europe 
destroyed  for  a  time  the  old  civilization  and  the  old  commerce. 
All  was  chaos  and  disorder,  and  the  night  of  ignorance  and 
superstition  prevailed.  The  semi-barbarous  immigrants  were 
content  with  the  simplest  necessaries  and  the  products  of  the 

soil.  There  was  no  demand  for  foreign  wares  or 
ig°iwrance  ^"'^      costly  articlcs  of  luxury  such  as  the  Roman  world 

had  used.  The  active  powers  of  man  were  devoted 
to  war,  strife  and  destruction  rather  than  the  arts  of  peace. 
The  hordes  of  barbarians  overturned  and  almost  annihilated 
every  monument  of  science  and  art  which  then  existed.  The 
progress  of  literature  was  arrested,  and  so  great  was  the  general 
ignorance  which  prevailed  that  persons  of  the  most  distinguished 
rank  could  neither  read  nor  write.  Many  charters  granted  by 
kings  and  others  in  high  authority  during  this  period  have  been 
preserved,  to  which  it  appears  they  were  unable  to  subscribe  their 
names,  and  then  originated  the  custom  for  those  who  could  not 
write  to  make  the  sign  of  the  cross — a  custom  held  to  the  present 
time,  but  seldom  used  in  this  enlightened  day. 

.It  was  impossible  in  the  four  or  five  centuries  after  the  fall 


80  HISTORY    OF    COMMERCE. 

of  Kome  to  carry  on  agriculture  or  other  industries  with  any 
degree  of  success.  The  bare  necessities  were  the  sole  aim  of 
a  great  majority  of  the  people.  Internal  trade  was  hardly 
more  successful  than  agriculture,  and  for  the  same  reason.  For 
several  centuries  there  is  no  trace  of  any  important  manufact- 
ures except  of  course  those  domestic  arts  of  weav- 
comm^rce  ^^^  ^^^  Spinning,  which  are  absolutely  necessary 

for  providing  clothes,  and  which  can  be  practiced 
by  separate  individuals  in  every  village  or  household.  Rich 
men,  indeed,  used  to  keep  artisans  in  their  households  as 
servants;  but  this  only  shows  that  there  were  no  recognized 
seats  of  manufacture  from  which  they  could  easily  procure 
what  they  wanted.  Even  kings  in  the  ninth  century  had  their 
clothes  made  by  the  women  upon  their  farms.  No  doubt  the 
villages  had  their  smiths  and  weavers,  but  these  occupations 
belonged  to  a  few  isolated  individuals,  and  had  not  yet  developed 
to  any  considerable  branch  of  industry.  Trade  between  various 
localities  was  very  limited,  for  the  general  insecurity  of  the 
times  made  mercantile  traffic  highly  dangerous.  The  want  of 
means  of  communication  and  transportation  prevented  men  from 
easily  moving  about  to  supply  one  another's  wants,  and  at  the 
same  time  made  it  difficult  for  them  to  ascertain  what  others' 
wants  were.  Eobbery  and  violence  were  frequent,  and  robbery 
by  extortionate  tolls  still  more  so.  The  ordinary  knight  of 
those  times  was  nothing  more  nor  less  than  a  bandit,  perhaps 
not  always  as  openly  criminal  as  a  highwayman,  but  very  often 
employing  the  same  methods.  Since  but  few  could  read  or 
write,  the  gates  to  the  temple  of  knowledge  were  shut  to  the 
great  body  of  the  people,  and  they  did  not  even  surmise  that 
they  had  any  right  to  explore  its  treasures.  Few  books  were 
written,  and  there  are  few  inventions,  useful  or  ornamental  to 
society,  of  which  this  long  period  of  nearly  five  centuries  can 
boast. 

About  the  year  800,  Karl  the  Great,  otherwise  known  in 


CHARLEMAGNE.  81 

history  as  Charlemagne,  was  made  king  of  the  Franks,  and  under 
his  wise   and  vigorous   rule  learning,  industry   and  commerce 

revived;  towns  and  cities  sprang  up  and  manu- 
a*!d'*^76^-^?4        factures  increased,  thus  laying  the  foundation  for 

the  revival  of  internal  and  foreign  commerce  which 
was  destined  to  set  in  about  two  centuries  later.  Charlemagne 
gave  every  freeman  a  share  in  the  making  of  the  laws,  and 
improved  the  administration  of  justice.  He  fostered  education 
by  establishing  schools  and  having  the  works  of  the  ancient 
Roman  writers  transcribed.  Unfortunately  his  successors  were 
weak  and  inefficient,  and  his  death  was  followed  by  a  period 
of  great  confusion,  during  which  Europe  was  severely  harassed 
on  the  south  by  the  Arabs,  on  the  east  by  the  Slavs  and  on  the 
north  by  the  Normans. 

Passing  over  a  period  of  perhaps  two  centuries  after  the 
reign  of  Charlemagne,  in  which  there  were  some  occasional 
indications  of  the  dawn  of  a  brighter  era,  the  inhabitants  of 
Revival  of  Europc  finally  began,  about  the  eleventh  century, 

Learning  and        to  experience  a  change  auspicious  of  better  times, 
ommerce  rpj^^  ^^^  ^^  making  paper  in  the  manner  now  be- 

come universal  was  invented,  and  greatly  increased  the  number 
of  manuscripts  and  the  general  diffusion  of  learning.  This,  fol- 
lowed by  the  discovery  of  the  art  of  printing,  brought  the  price 
of  books  within  the  reach  of  those  of  moderate  means.  Then 
came  the  discovery  of  the  mariner's  compass,  making  it  possible 
to  extend  navigation  which  had  hitherto  been  confined  to  the 
coast  and  the  Mediterranean  Sea,  over  the  ocean,  leading  to  new 
and  rich  discoveries,  and  preparing  the  way  for  the  commerce  of 
the  future.    The  Feudal  system*  had  been  established  after  the 


♦The  Feudal  system  was  a  combination  of  Roman  and  German  laws  and 
customs  involving  the  tenure  or  ownership  of  land  and  military  service  to 
the  lords  or  the  king.  After  the  conquest  of  the  Roman  provinces  in  Prance 
and  Germany  the  land  was  generally  divided  by  the  conquerors  into  three 
portions:  the  king  took  one;  another  he  divided  among  his  generals  and 
soldiers  under  the  condition  of  military  service;  the  third  was  left  to  the 


32  HISTORY    OF    COMMERCE. 

reign  of  Charlemagne,  and  this  favored  the  growth  of  towns  and 
consequently  an  increase  in  industry  and  commerce  by  the  sta- 
bility which  it  gave  to  property  and  society  in  general.  Trade 
guilds  and  craft  guilds  were  organized,  suggesting  the  idea  of 
mutual  help  and  co-operation.  Trade  guilds  embodied  the  idea 
of  our  modern  chambers  of  commerce,  and  exerted  considerable 
influence  upon  the  government  of  the  town.  Craft  guilds  aimed 
to  secure  good  handiwork  on  the  part  of  members,  to  regulate 
the  number  of  apprentices  and  to  provide  a  common  fund  in  case 
of  sickness,  very  much  after  the  plan  of  labor  unions  in  our  day. 
While  the  introduction  of  the  Feudal  system  was  an  aid  to  com- 
merce by  settling  society  into  a  more  stable  and  organized  form, 
it  finally  became  a  hinderance  on  account  of  the  restrictions  which 
it  imposed  upon  both  property  and  persons.  The  service  exacted 
Eifectof  °^  vassals  often  interfered  with  their  employment 

Feudalism  on       by  Calling  them  away  from  agriculture  or  other 
ommerce  occupatious  at  tinics  whcu  they  were  needed.    The 

lords  levied  heavy  assessments  and  fines  upon  those  who  were 
dependent  upon  them  for  every  attempted  change  of  occupation, 
so  that  those  who  desired  to  give  up  agriculture  and  become 
artisans  or  traders  were  hampered  in  their  efforts.  Jealousies 
and  rivalries  between  the  lords  of  different  territories  caused 
taxes  to  be  laid  upon  the  commerce  between  one  domain  and 


original  inhabitants  upon  the  payment  of  a  tax.  But  for  the  purpose  of 
binding  certain  of  his  subjects  more  closely  to  the  throne,  the  king  granted 
out  a  part  of  his  own  land  to  them  for  life.  This  was  called  a  fief;  the 
giver  was  the  liege  lord,  and  the  receiver  was  called  a  vassal*.  In  the  same 
way,  those  who  had  acquired  large  life  estates  as  fiefs,  sub-let  to  those  less 
fortunate,  portions  of  their  estates  and  thus  had  vassals  of  their  own. 
Bishops  gave  fiefs  to  knights  for  services  in  defending  convents,  and  thus 
society  was  bound  together  by  a  system  of  service  and  obligations  for 
mutual  protection  and  defense.  Gradually  the  more  powerful  oppressed 
those  under  them  until  the  class  which  cultivated  the  soil  became  hereditary 
serfs  attached  to  the  land,  and  in  reality  slaves.  The  Feudal  system,  while 
affording  the  benefits  of  protection  to  property,  was  a  great  hinderance  to 
freedom  of  both  person  and  property,  since  under  it  land  could  not  be 
conveyed,   nor  serfs  transferred  readily. 


^  ^  or 

VENfGBi^£iii>^  33 

another,  and  thus  the  system  eventually  proved  to  be  restrictive 
and  injurious  to  the  development  of  trade  and  commerce. 

About  the  twelfth  century  a  number  of  Italian  cities  came 
into  prominence  on  account  of  the  trade  and  manufactures  which 
they  had  built  up.  Among  these  Venice,  situated  on  a  group 
of  sandy  and  barren  islands  in  the  Adriatic  Sea,  whither  its  in- 
habitants had  been  driven  by  the  armies  of  Attila,  was  the  most 
important.  The  wealth  of  Venice  was  originally  due 
venicr'^"  °  to  two  articles  of  commerce,  viz.,  salt  and  fish,  these 
being  the  only  products  obtainable  on  account  of 
the  location  of  the  city.  The  Venetians  built  up  a  large  trade 
with  mainland  cities,  and  eventually  embarked  in  the  carrying 
trade.  Their  ships  went  up  and  down  the  coast,  as  far  east  as 
Greece  and  west  to  Spain.  Salt  and  fish  were  exchanged  with 
other  cities  for  oil,  wine,  lumber  and  metals.  Extending  her 
commerce,  Venice  brought  the  products  of  Egypt  and  the  East 
to  her  wharves,  and  the  city  soon  became  the  emporium  of 
southern  Europe.  Her  ships  now  touched  every  shore  and  part 
of  the  then  civilized  world,  and  her  commerce  included  every 
article  of  value.  To  protect  her  ships  from  robbers  and  pirates 
she  built  an  extensive  navy,  and  each  fleet  of  ships  was  convoyed 
by  a  man  of  war.  Her  merchant  squadrons  numbered  in  all  over 
3,000  ships,  and  made  regular  sailings.  Besides  her  maritime 
commerce,  Venice  built  up  a  large  overland  trade  with  Germany 
and  central  European  points. 

By  her  extensive  trade  and  navigation  Venice  raised  herself 
to  a  degree  of  prosperity  and  magnificence  which  recalls  the 
memory  of  the  most  flourishing  period  of  ancient  Greece.  She 
established  a  republican  form  of  government, 
Tf  ve^cT'*'  built  gorgeous  palaces  (that  of  the  Doge  or  Gov- 
ernor), magnificent  churches  (the  Cathedral  of 
St.  Mark),  and  splendid  squares  (that  of  St.  Mark),  and  made 
the  city  the  wonder  of  the  world.  The  Venetians  supplied  salt 
and  fish  to  nearly  the  whole  world,  a  trade  in  which  they  had 


34  HISTORY    OF    COMMERCE. 

a  complete  monopoly;  and  in  every  instance  where  a  treaty  was 
made  with  a  foreign  power  a  clause  was  introduced  reserving 
to  Venice  the  exclusive  privilege  of  supplying  these  commodi- 
ties. Besides  its  enormous  trade,  Venice  engaged  extensively  in 
manufacturing,  and  exported  its  wares  to  all  parts  of  Europe  and 
Asia.  Silk  was  one  of  the  most  valuable  products  of  its  artisans, 
the  art  of  weaving  this  into  beautiful  tissues  having  been  learned 
from  the  Persians.  Another  product  was  glass,  which  they  made 
from  the  sand  of  their  own  islands  in  such  a  high  degree  of 
skill  that  Venetian  glass  became  celebrated  everywhere  for  its 
clearness  and  beauty.  This  art  the  Venetians  had  learned  from 
the  Arabs,  and,  with  the  decorative  art  and  skill  which  they 
possessed,  were  able  to  produce  glass  work  of  rare  beauty.  They 
also  made  woolen  and  cotton  cloths  from  the  raw  products  which 
they  imported  from  Spain,  Greece  and  Egypt,  and  carried  on 
extensive  manufactures  in  brass  and  iron,  so  that  their  shields 
and  armors  were  the  most  beautiful  and  excellent  in  Europe. 
The  Venetians  kept  constantly  developing  their  shipping  facili- 
ties. They  made  extensive  improvements  in  the  methods  of 
marine  and  naval  construction,  established  arsenals  and  eventu- 
ally acquired  naval  supremacy. 

But  this  energetic  and  progressive  people  seemed  possessed  of 
a  natural  faculty  for  finance  and  commerce.  They  were  natural 
born  traders  and  financiers.  A  great  feature  of  the  wealth  of 
the  city  was  its  banking  facilities.  The  bank  of  Venice,  estab- 
lished in  1171,  was  the  first  regularly  organized  bank  in  the 

world,  although  it  did  not  develop  all  of  the  func- 
venice^"  °  ^^^^^  ^^  ^  modcm  bank  until  long  after.     The 

republic,  being  hard  pressed  for  money,  on  three 
different  occasions  was  obliged  to  levy  forced  contributions  upon 
the  citizens,  and  in  return  gave  them  perpetual  annuities  at 
certain  rates  per  annum  on  the  amount  loaned.  The  offices  for 
the  payment  of  these  annuities  were  consolidated  and  became 
the  Bank  of  Venice.     The  annuities  or  interest  on  the  govern- 


VENICE.  .  85 

ment  loans  being  punctually  paid,  the  amount  of  the  loan  as 
registered  upon  the  books  of  the  bank  came  to  be  considered  as 
a  species  of  property  and  passed  from  one  person  to  another  by 
devise,  descent  and  assignment.  Debts  were  frequently  paid 
in  this  manner,  and  by  allowing  the  mutual  cancellation  of 
debts  by  the  transfer  of  credits  on  the  books  of  the  bank,  the  use 
of  money  was  at  first  saved  to  a  considerable  extent,  and  later 
certificates,  payable  to  bearer,  the  equivalent  of  bank  bills,  v/ere 
used  to  obviate  the  necessity  for   entries  upon  the  books. 

The  "Rialto"  was  their  great  commercial  exchange  where 
the  merchants  met  and  did  their  trading.  The  transactions 
of  this  exchange  had  a  wider  influence  on  the  commerce  of  the 
world  at  that  time  than  any  other  market.  The  Venetians  were 
the  first  to  reduce  finance  to  a  science.  They  were  the  origin- 
ators of  the  system  of  double  entry  book-keeping, 
Jnd  Learning"  wMch  we  usc  with  modifications  to  this  day.  They 
are  credited  by  some  authorities  with  having  a 
knowledge  of  printing  prior  to  Coster  and  Gutenberg  (A. D. 1440), 
having  (as  has  been  asserted)  received  it  from  the  Chinese,  by 
whom  the  art  had  been  practiced  for  two  thousand  years.  We  know 
that  Venice  took  the  lead  of  all  Europe  in  the  manufacture  of 
books  and  that  newspapers  were  first  issued  by  them,  thus  indi- 
cating that  Italy  stood  in  the  van  of  progress  and  enlightenment 
at  the  close  of  the  fifteenth  century. 


CHAPTER  IV. 

MEDIEVAL  COMMERCE— Continued. 

DECLINE    OF    VENICE;    COMMERCE    OF    GENOA,    FLORENCE    AND 
PISA-EFFECT  OF   DISCOVERY   OF  AMERICA. 

Besides  Venice  there  were  several  Italian  cities  which 
achieved  great  renown  in  commerce,  art  and  learning  during 
the  middle  ages.    These  were  Genoa,  Florence,  Pisa  and  Milan. 

They  followed  Venetian  methods  to  a  consider- 
ofvenke^^         able  degree  and  seemed  possessed  in  a  measure  of 

the  Venetian  character  for  commerce  and  finance. 
Rivalries  sprang  up  and  wars  between  Venice  and  these  cities 
were  frequent  and  bitter.  Genoa  was  an  inveterate  enemy  of 
Venice  and  their  conflicts  at  times  remind  one  of  the  Punic  Wars 
waged  between  Rome  and  Carthage.  Venice  may  be  said  to  have 
reached  the  period  of  its  greatest  wealth  and  power  about  the 
fourteenth  century.  Then,  by  gradual  steps,  the  original,  demo- 
cratic constitution  of  the  Republic  was  changed  into  an  oppres- 
sive, hereditary  aristocracy  and  the  power  of  the  state  vested  in  a 
few  noble  families.  Venice  was  governed  with  dictatorial  power; 
a  state  Inquisition  with  subterranean  dungeons  and  racks  was 
established,  and  every  act  of  the  people  was  watched,  every  word 
listened  to.  Along  with  this,  luxury  and  wealth  had  brought 
corruption  in  office,  and  the  moral  tone  of  the  people  declined, 
thus  sowing  the  seeds  of  national  weakness  and  decay.  Two 
other  circumstances  contributed  directly  and  powerfully  to  the 
decline  of  Venice.  The  first  of  these  was  the  continued  successes 
of  the  Turks  in  the  East,  by  which  Venice  was  robbed  of  the 
commercial  advantages  which  she  had  so  long  and  profitably 
enjoyed,  together  with  the  loss  of  the  island  of  Crete,  one  of  her 
richest  colonies;  and  the  other  was  the  discovery  of  the  sea  route 


GENOA.  37 

to  India  by  way  of  the  Cape  of  Good  Hope.  These  diverted  a 
considerable  portion  of  the  commerce  of  Western  Europe  from  its 
former  channels  through  the  Mediterranean,  and  thus  reduced 
the  commerce  of  Venice  accordingly. 

Genoa  was  the  proud  rival  of  Venice.  Founded  by  the 
Romans  before  the  Christian  era,  Genoa  flourished  as  a  com- 
mercial emporium  from  the  beginning.  It  had  a  spacious  har- 
bor, from  which  it  sent  timber,  wool  and  earthenware  to  other 
parts  of  Italy  in  exchange  for  wine  and  oil.  After  the  fall  of 
the  Roman  Empire,  Genoa  set  up  a  republican  form  of  govern- 
ment and  in  the  tenth  century  built  a  navy  with 
GenoT'"°^  which  it  began  to  reach  out  for  a  share  of  the 
Mediterranean  commerce.  It  established  a  pros- 
perous trade  with  Sicily,  the  north  coast  of  Africa,  and  the 
southern  coast  of  France.  The  islands  of  Corsica  and  Capraja 
became  Genoese  colonies,  and  an  overland  trade  was  established 
with  Flanders  and  Germany.  Like  the  other  Italian  cities 
Genoa  profited  by  the  Crusades,  for  in  return  for  the  help  ren- 
dered by  it  to  the  crusaders  the  republic  was  granted  a  strip  of 
Phoenician  territory  and  various  privileges  of  trade  in  Syria, 
which  gave  it  a  valuable  portion  of  eastern  trade,  and  enabled 
the  republic  to  eventually  get  a  firm  foothold  in  Greece  and  Asia 
Minor.  "With  a  flourishing  commerce,  the  harbor  of  Genoa  was 
constantly  filled  with  a  forest  of  masts;  her  commercial  ex- 
changes were  only  second  to  the  Rialto  of  Venice  in  size  and 
importance  and  her  marble  palaces  gave  evidence  of  her  increas- 
ing wealth.  The  growth  of  Genoese  commerce  and  influence 
aroused  the  jealousies  of  the  other  republics  of  northern  Italy, 
especially  Venice  and  Pisa,  and  they  sought  by  every  means  in 
their  power  to  limit  her  ambition.  From  the  eleventh  to  the 
end  of  the  fourteenth  century  Genoa  was  almost  constantly  at 
war  with.  Venice,  thus  wasting  the  possibilities  of  both  republics 
in  domestic  broils  and  interminable  rivalries.  They  first  came 
into  serious  conflict  when  the  merchants  of  Genoa  attempted 


38  HISTORY    OF    COMMERCE. 

to  obtain  a  share  of  the  trade  of  the  Grecian  Archipelago  and 
Black  Sea  Ports.  Finally  in  the  latter  part  of  the  thirteenth 
century  the  Genoese  triumphed  over  the  Venetian  fleet,  and  in 
the  treaty  of  peace  which  followed  Venice  surrendered  to  Genoa 
her  commerce  in  the  Black  Sea,  and  her  colonies  and  agencies 
which  had  been  planted  there. 

Genoa  possessed  but  few  industries  of  her  own,  her  commerce 
consisting  chiefly  of  the  exchange  of  the  productions  of  the 
East  with  those  of  the  West,  taking  chiefly  cloths  and  pottery 

from  France  and  linen  and  leather  from  Germany 
imTus^toies  *^  *^^  ^^st,  and  bringing  from  the  Black  Sea  and 

other  eastern  ports  fine  cloths,  spices,  silks  and 
ivory.  However,  near  the  close  of  the  twelfth  century,  the 
Genoese  had  plundered  two  Moorish  cities  in  Spain,  from  which 
they  derived  the  art  of  silk  manufacture,  and  so  successful  did 
the  industry  prove,  that  silk  became  a  staple  manufacture 
among  all  the  Lombard  republics,  and  the  cultivation  of  mul- 
berry trees  was  enforced  by  their  laws.  Woolen  goods  were  also 
manufactured  by  the  Genoese  to  a  considerable  extent. 

Usury,  or  lending  money  on  interest,  was  regarded  as  a  crime 
by  the  theologians  of  the  middle  ages.  This  strange  prejudice 
against  one  of  the  most  useful  and  legitimate  branches  of  busi- 
Genoese  ^^^^  Continued  for  hundreds  of  years,  and  although 

Finance  and         finally  eradicated,  had  its  effect  upon  legislation 
*^^  in  modern  times.    The  trade  in  money,  and  indeed 

a  large  part  of  the  inland  trade  in  general  of  the  Italian  cities, 
had  fallen  into  the  hands  of  the  Jews,  who  were  noted  for 
their  usury.  They  were  not  molested  by  the  clergy,  being  re- 
garded as  infidels,  and  they  had  no  conscientious  scruples  them- 
selves against  usury,  since  the  Jewish  law  permitted  them  to 
charge  usury  against  Gentiles.*  The  rates  of  interest  were  ten 
to  fifteen  per  cent,  per  annum.     At  Verona  in  1228  the  rate 

♦Unto  a  stranger  thou  mayest  lend  upon  usury.     But  unto  thy  brother 
thou  Shalt  not  lend  upon  usury.     Deut.  XXIII. 


DECLINE    OF    GENOA.  89 

was  fixed  by  law  at  twelve  and  one-half  per  cent;  at  Modena 
in  1270  it  seems  to  have  been  as  high  as  twenty  per  cent.,  and 
in  France  and  England  still  more  oppressive.  The  republic  of 
Genoa,  towards  the  end  of  the  fourteenth  century  when  it  had 
grown  wealthy,  paid  from  seven  to  ten  per  cent,  on  its  outstanding 
obligations.  The  high  rate  of  interest  generally  during  this 
period  was  owing  partly  to  risks,  business  being  hazardous  on 
account  of  inefficient  laws,  and  also  to  the  fact  that  profits  in 
business  were  very  large.  The  Venetian  merchants  are  said  to 
have  cleared  never  less  than  forty  per  cent,  profit  on  their  com- 
mercial transactions,  and  since  Genoa  and  the  other  Italian  cities 
exercised  monopolies  we  may  safely  assume  that  their  profits  were 
enormous.  In  the  last  part  of  the  thirteenth  century  the  bank- 
ers in  the  Italian  cities  and  those  of  the  south  of  France  took  up 
the  business  of  remitting  money  by  means  of  bills  of  exchange, 
and  charging  interest  on  loans.  A  distinction  was  then  made 
between  moderate  and  exorbitant  interest,  and  the  utility  of 
negotiable  bills  of  exchange  was  so  great  that  gradually  the 
prejudice  against  usury  (interest)  wore  away,  and  the  Lombard 
usurers  established  themselves  in  every  country. 

Having  finally  been  robbed  of  its  Black  Sea  commerce  by  the ' 
Turks,  and  later  defeated  by  the  superior  power  of  its  old  enemy 
the  Venetians  in  other  parts  of  the  Mediterranean,  the  Genoese 

turned  their  attention  in  another  direction,  hoping 
Ameri(»^°         thereby  to  retrieve  their  fortunes.     There  were 

among  Genoese  sailors  some  who  were  acquainted 
with  the  globular  form  of  the  earth,  having  acquired  this  knowl- 
edge from  the  Mohammedan  astronomers,  and  these  men  orig- 
inated the  attempt  to  reach  India  by  sailing  to  the  west.  Great- 
est and  best  among  them,  seeking  the  welfare  of  his  city  and 
hoping  that  the  riches  of  India  might  thus  be  secured,  was 
Christopher  Columbus,  the  son  of  a  wool  comber.  He  had 
studied  the  ordinary  branches  of  arithmetic,  drawing  and  paint- 
ing, and  is  said  to  have  acquired  a  singularly  beautiful  hand- 


40  HISTORY    OF    COMMERCE.     ' 

writing.  After  attending  the  university  for  a  short  time,  he 
went  to  sea  when  fourteen  years  of  age,  and  for  many  years  was 
engaged  in  the  Syrian  trade  and  in  that  of  other  ports,  later  turn- 
ing his  attention  to  the  construction  of  charts  for  sale,  and  the 
deeper  study  of  geography  and  navigation. 

The  result  of  Columbus'  discovery  was  to  draw  the  attention 
of  Europe  to  the  westward  and  dispel  the  mystery  of  the  open 
sea.  Migration  set  in  towards  the  western  coast  of  Europe,  and 
Decline  of  ^^^  ^^^  routc  to  India  diverted  commerce  in  other 

Genoese  chauncls.     Gcuoa  became  subject  to  Milan,  and 

Commerce  although  it  again  grew  prosperous,  it  never  re- 

gained its  former  commercial  importance. 

Only  second  in  importance  to  the  republics  of  Venice  and 
Genoa  was  the  city  of  Pisa,  situated  in  a  plain  between  the  Appe- 
nines  on  the  east  and  the  Tuscan  Sea  on  the  west.  The  founding 
of  the  city,  like  that  of  Genoa,  dates  back  to  the  Eoman  Empire, 
and  like  all  other  Italian  cities,  Pisa  suffered  from  the  barbarian 
conquest;  but  like  them,  too,  she  secured  her  independence,  set 
up  a  republican  form  of  government,  and  rapidly  sprang  forward 
to  a  foremost  place  among  the  maritime  states  of  Italy.  In  the 
eleventh  century  Pisa  acquired  the  islands  of  Sardinia,  Corsica 
and  Elba,  besides  adding  many  important  districts  along  the 
coast  to  its  territory,  with  all  of  which  it  carried  on  a  prosperous 
commerce.  The  crusades  poured  fresh  wealth  into  the  lap  of 
Pisa,  and  in  return  for  its  help  in  transporting  the  armament  to 
Palestine,  Pisa  was  given  extensive  privileges  and  became  one 
of  the  channels  through  which  the  produce  of  the  east  flowed 
in  upon  the  ruder  nations  of  western  Europe.  Pisa  reached  the 
zenith  of  its  power  at  about  the  end  of  the  eleventh  century.  Its 
prosperity  was  marked  by  public  edifices  which  stand  as  monu- 
ments to  Pisan  greatness  to  this  day.  Pisa  was  the  first  Italian 
city  which  took  pride  in  architecture,  and  its  leaning  tower  and 
cathedral  are  examples  of  skill  and  beauty.  It  was  in  this 
cathedral  that  the  illustrious  philosopher,  Galileo,  watched  the 


FLORENCE.  41 

swinging  of  the  chandelier,  and  observing  that  its  vibrations, 
large  and  small,  were  made  in  equal  times,  "left  the  house  of 
God,  his  prayers  unsaid,  but  the  pendulum  clock  invented." 

The  Pisans  are  also  credited  with  being  the  first 
^nTi^e^niag       *^  codifj  and  promulgate  a  system  of  maritime 

law  suited  to  the  extensive  Mediterranean  com- 
merce, defining  the  rights  of  neutral  and  belligerent  vessels, 
and  thus  laying  the  foundation  for  a  portion,  at  least,  of  the  in- 
ternational law  of  modern  times.  In  the  course  of  time  Pisa 
succumbed  to  the  wars  and  competition  of  rival  cities.  Genoa 
was  its  most  bitter  enemy,  and  in  one  fatal  battle  off  the  Island  of 
Meloria,  in  1284,  the  entire  Pisan  navy  was  destroyed.  Torn  by 
dissensions,  and  stripped  of  her  commerce  and  colonies,  Pisa 
was  finally  sold  in  1406  to  Florence  for  400,000  florins,  and  be- 
came a  port  for  the  commerce  of  that  city. 

Situated  above  Pisa,  on  the  River  Arno,  and  being  without 
shipping  facilities,  the  success  and  commercial  importance  of 
Florence   were    achieved   in   the    direction    of   manufacturing, 

finance,  literature  and  art,  rather  than  maritime 
Florence  trade.    Her  weavers  and  goldsmiths  were  famed  all 

over  Europe  for  their  fine  products,  and  her  silk 
and  woolen  cloths  and  articles  of  jewelry  were  exported  to  all 
the  principal  cities  of  the  western  world.  Like  the  other  Italian 
cities,  Florence  was  vexed  and  retarded  by  internal  revolutions 
and  external  strifes.  In  the  latter  part  of  the  thirteenth  century 
a  republican  form  of  government  was  established,  which  con- 
tinued in  modified  forms  for  several  hundred  years.  Notwith- 
standing the  wars  and  strifes  in  which  Florence  engaged  in 
common  with  her  sister  republics,  her  growth  in  wealth  and 
population  continued  without  abatement,  until  at  one  time  she 
was  not  only  the  capital  of  Tuscany,  but  the  chief  city  of  all 
Italy. 

In  the  fifteenth  century  the  great  family  of  Medici,  Floren- 
tine bankers,  succeeded  in  obtaining  control  of  the  government 


42  HISTORY    OF    COMMERCE. 

of  Florence  and  changing  it  from  a  republic  to  an  hereditary 
aristocracy,  but  while  this  was  a  blow  to  popular  government, 
yet  the  remarkable  character  of  the  Medicis  and  their  vigorous 
and  enlightened  rule  were  by  no  means  discouraging  to  the  com- 
mercial and  artistic  progress  of  the  city.  Indeed  it  was  under  the 
Florence  under  Mcdicis  that  Florence  achieved  its  greatest  glory, 
the  House  of  TMs  Celebrated  family  of  bankers  was  founded 
'^**^*"  by   Giovanni   de  Medici,   a  merchant  and  after- 

wards a  banker,  about  the  middle  of  the  fifteenth  century,  but 
the  greatest  of  the  family  were  Cosmos  and  Lorenzo,  sons  of 
Giovanni.  The  latter,  surnamed  the  "Magnificent,"  so  gov- 
erned Florence  that  all  Europe  was  filled  with  his  fame.  Eichest 
of  Italians  that  he  was,  he  lavished  his  wealth  on  palaces, 
churches,  hospitals  and  libraries.  He  made  Florence  the  seat 
of  every  art  and  science  and  a  seminary  for  all  Europe.  His 
court  was  ornamented  with  artists,  poets  and  writers.  Learned 
men  from  Greece  and  other  portions  of  the  East,  who  were 
flying  from  the  sword  of  the  Turks,  taught  the  Greek  language 
and  literature  in  Florence;  and  under  his  rule,  sculpture,  paint- 
ing and  music  began  to  unfold  their  choicest  blossoms.  Florence 
was  called  "The  Athens  of  the  West,"  and  to  this  period  of  its 
history  we  are  indebted  for  the  names  of  Michael  Angelo  the 
sculptor,  Dante  the  poet,  Machiavelli  the  statesman,  and  Amerigo 
Vespucci,  the  discoverer  of  our  western  hemisphere. 

The  banking  houses  of  Florence  were  the  largest  and  wealth- 
iest of  Europe,  and  through  them  nearly  every  great  loan  made 
by  the  kings  of  central  and  western  Europe  to  carry  on  their 
wars  was  negotiated.     The  houses  of  Bardi,  Pitti, 
Bankerr*^  Mcdici  and  Peruzzi  were  the  leaders  in  the  finan- 

cial world  during  the  thirteenth  and  fourteenth 
centuries,  and  are  said  to  have  been  "The  pillars  which  sustained 
a  great  part  of  the  commerce  of  Christendom."  The  customs  of 
England  were  farmed  to  the  Bardi  in  1329  as  a  security  for 
loans,  and  they  probably  had  excellent  bargains.     In  1345  the 


MILAN.  48 

Bardi  and  the  Peruzzi  failed.  Edward  III  of  England  owed  the 
Bardi  900,000  gold  florins  and  the  Peruzzi  600,000  florins,  which 
he  was  unable  to  pay  on  account  of  his  wars  with  France.  The 
king  of  Sicily  also  owed  each  of  these  houses  100,000  florins 
which  he  was  unable  to  pay.  On  the  other  hand  the  Bardi  had 
deposits  belonging  to  citizens  and  merchants  to  the  amount  of 
550,000  florins,  and  the  Peruzzi  were  carrying  deposits  to  the 
amount  of  350,000  florins  in  gold.  Unable  to  collect  from  the 
kings  the  bankers  were  equally  unable  to  pay  their  depositors. 
The  failure  of  these  two  banks  caused  great  distress  to  the  city 
and  injury  to  its  commercial  interests. 

Milan,  the  ancient  capital  of  Cisalpine  Gaul,  and  the  favorite 
residence  of  the  Gothic  kings,  is  the  fifth  of  the  Italian  cities 
which  achieved  commercial  distinction  in  the  middle  ages. 
Without  a  seaport,  she  acquired  her  greatness  by 
Miten***^*^°  agriculture  and  manufacture  rather  than  through 
maritime  commerce.  Situated  in  a  beautiful  plain 
of  fertile  land  through  which  coursed  a  tributary  of  the  River  Po, 
the  Milanese  early  turned  their  attention  to  agriculture  and  the 
industrial  arts.  The  invasion  of  the  Huns  in  899  caused  the 
Milanese  to  wall  in  and  fortify  the  city,  and  thus  later  it  became 
independent  of  the  feudal  barons  of  northern  Italy,  and  set  up 
its  own  republican  form  of  government.  After  the  peace  of 
Constance  in  1184,  Milan  grew  apace  both  in  population  and 
material  wealth.  Manufactures  flourished  extensively,  the  lead- 
ing industry  being  the  making  of  armor. 

During  her  struggles  with  the  Emperor  Frederick  of  Ger- 
many (Frederick  Red-Beard)  for  the  preservation  of  Milanese 
independence,  a  powerful  fraternity  called  the  Umiliati  was 
formed,  which  later  became  instrumental  in  developing  the  wool 
trade  and  subsequently  gave  the  first  impetus  to  the  production 
of  silk.  From  this  period  also  date  the  irrigation  works  which 
render  the  plain  about  Milan  a  productive  garden  to  this  day. 
In  the  thirteenth  century  Milan  was  greatly  retarded  in  her  de- 


MILAN.  "  45 

velopment  by  the  turmoils  of  the  Guelphs  and  the  Ghibelines, 
the  partisans  of  first  one  and  then  the  other  obtaining  control 

of  the  government.  In  the  fourteenth  century  the 
con*tro/'°  great   family   of   Giovanni  Galeazzo,   one   of  the 

Visconti,  became  sole  lord  of  Milan,  and  inaug- 
urated a  remarkable  career,  resembling  in  many  respects  those 
of  the  Medicis  in  Florence.  It  was  under  him  that  the  Cathedral 
of  Milan  was  begun  in  1386.  It  is  built  of  marble  from  the 
quarries  which  Visconti  gave  for  the  purpose.  The  work  upon 
this  wonderful  building  was  continued  through  several  cen- 
turies, and  finally  finished  under  Napoleon  in  1805.  After  many 
vicissitudes  and  strifes,  Milan,  in  1500,  passed  under  control 
alternately  of  France  and  Spain,  and  finally  became  a  part  of  the 
Kingdom  of  Italy.  Owing  to  its  agricultural  and  manufacturing 
interests,  it  suffered  less  than  the  maritime  cities  of  Italy  by  the 
discovery  of  the  Cape  route  to  India. 

Gradually  the  seat  of  commercial  empire  shifted  from  the 
Italian  cities  to  othej  parts  of  Europe,  north  and  west.     The^ 
inventions  and  discoveries  incident  to  the  general  intellectual 
Change  of  awakening  which  set  in  about  the  fifteenth  cen- 

commerciai  tury,  the  invention  of  the  art  of  printing,  the 
Centers  mariner's   compass,   the   use   of  gunpowder,   im- 

provements in  shipbuilding  and  in  methods  of  finance,  com- 
merce, and  law,  worked  changes  in  the  established  channels  of 
trade  and  developed  new  centers  of  commerce.  We  are  now  to 
leave  the  Mediterranean  Sea,  upon,  whose  shores  was  grouped 
the  ancient  and  medieval  commerce  and  civilization  of  the 
world,  and  betake  ourselves  to  other  parts  of  Europe. 


CHAPTER  V. 

MODERN  COMMERCE. 

THE    CAPE    ROUTE    TO    INDIA;    PORTUGUESE    COMMERCE;    SPAIN'S 

VAST  POSSESSIONS;  EXPULSION  OF  THE   MOORS; 

DUTCH    COMMERCE. 

Allusion  has  been  made  to  the  discovery  of  America  and  of 
the  Cape  Route  to  India,  two  events  which  occurred  at  the 
dawn  of  the  modern  era  of  history,  and  were  destined  to  exer- 
cise a  momentous  influence  upon  the  commerce  of  the  world  as 
well  as  the  progress  and  w^elfare  of  the  human  race.  Near  the 
close  of  the  fifteenth  century  the  map  of  the  world  consisted 

of  central  and  southern  Europe,  the  north  coast  of 
New°Era*  Africa,  and  Asia  as  far  as  Persia.     India  and  the 

far  East  was  a  land  of  mystery,  while  the  West 
was  a  waste  of  waters  enveloped  in  glooni  and  superstition. 
With  the  aid  of  the  mariner's  compass  bold  navigators  had 
gradually  ventured  farther  from  land,  and  in  1431  a  ship  captain 
from  Bruges  had  sighted  the  Azore  Islands.  The  Atlantic  was 
bein^  gradually  explored. 

The  Portuguese  were  at  this  time  an  enterprising  and  grow- 
ing commercial  and  maritime  people  and  their  capital,  Lisbon, 
owing  to  its  frontier  position,  had  become  an  important  distribut- 
ing point  for  products  on  the  western  coast  of  Europe.  In  1496 
a  Portuguese  navigator,  Vasco  de  Gama,  steering  his  course 
southward  along  the  shores  of  Africa,  finally  doubled  the  Cape 

of  Good  Hope  and  reached  India,  to  return  with 
Routeto^india       fabulous   accouuts    of   its   Wealth   and   mysteries. 

The  importance  of  this  discovery  was  enhanced  by 
the  fact  that  at  this  time  the  Turks,  Moors  and  Algerians  were 
swarming  around  the  shores  of  the  Mediterranean  Sea,  capturing 

46 


THE    PORTUGUESE.  47 

ships  and  caravans  and  destroying  commerce,  so  that  the  old 
routes  to  India  overland  by  caravans  were  no  longer  safe. 
Venice,  owing  to  the  decline  of  her  commerce,  was  no  longer  able 
to  successfully  resist  these  inroads  and  attacks,  and  hence  the  new 
route  afforded  an  effectual  escape  from  this  serious  difficulty. 
Besides,  an  all  sea  route  avoided  the  labor  and  damage  to  goods 
incident  to  handling  them  in  changing  from  ship  to  camels  or 
the  reverse,  and  furthermore,  by  this  sea  route  the  traders  were 
enabled  to  go  to  India  and  see  the  country  for  themselves,  exam- 
ine its  products  and  judge  of  its  resources  and  wants,  instead  of 
trading,  as  hitherto,  chiefly  through  Arabian  merchants.  Thus 
we  see  the  importance  of  the  discovery  of  the  new  route,  and  its 
effect  in  diverting  European  commerce  from  Mediterranean  ports, 
to  which  it  only  returned  after  the  completion  of  the  Suez  Canal 
in  our  own  time. 

The  Portuguese  established  colonies  on  the  coast  of  Malabar 
and  the  island  of  Ceylon.  After  some  conflicts  with  the  natives 
on  account  of  outrages  inflicted  upon  them,  aided  by  the  Moham- 
„  _^  medan  merchants  and  even  bv  the  Venetians  who 

Portuguese 

Trade  in  the  sought  to  cxpcl  their  rival  from  this  rich  field  of 
^*^*  commerce,  the  Portuguese  succeeded  in  firmly  es- 

tablishing an  extensive  trade  with  India.  By  1515  they  had 
captured  a  number  of  cities  along  the  coast,  subjugated  the 
spice  bearing  islands,  and  really  controlled  the  commerce  of  the 
coast  of  Asia  extending  from  the  Persian  Gulf  to  the  islands  of 
Japan.  Lisbon  became  the  seat  of  this  extensive  commerce  and 
the  distributing  point  for  the  products  of  India. 

Early  in  the  spring  of  each  year  a  fleet  of  Portuguese  ships  set 
sail  for  India,  convoyed  by  war  ships.  The  route  lay  along  the 
west  coast  of  Africa;  and  after  doubling  the  Cape,  the  trade 
winds  assisted  them  in  an  easy  and  direct  voyage  across  the 
Indian  Ocean  to  the  city  of  Goa,  on  the  west  coast,  their  prin- 
cipal port.  Eeturning,  the  route  was  much  the  same,  except 
that  the  fleet  touched  at  various  trading  stations  along  the  coast 


48  HISTORY    OF    COMMERCE. 

of  Africa,  thence  at  St.  Helena,  the  Cape  Verde  and  Azore 
islands,  and  home.  The  voyage  usually  required  about  eighteen 
months  for  its  completion,  and  owing  to  inferior  ships  and  the 
imperfect  knowledge  of  navigation  which  prevailed  at  that  time, 
frequently  resulted  in  the  loss  of  a  portion  of  the  fleet.  But  the 
profits  of  this  commerce  were  very  large  and  the  field  of  adven- 
ture enticing. 

From  India  the  Portuguese  ships  brought  to  Europe  in 
greater  abundance  those  products  frequently  mentioned  hereto- 
fore as  having  been  imported  by  the  caravans  of  Arabia  and 
Persia.  From  the  west  coast  of  Africa  and  the  islands  they 
brought  ivory,  gold,  gum,  wine,  cotton,  and  slaves.  To  Lisbon 
came  the  ships  of  Britain,  Flanders,  and  the  Hansa  towns  of  the 
North  and  Baltic  Sea  ports,  to  receive  their  cargoes  for  home 
consumption,  and  for  a  time  Lisbon  promised  to  eclipse  the 
wealth  and  commercial  greatness  of  even  Venice  or  Genoa. 
Having  succeeded  so  well  in  the  East,  the  Portuguese  turned 
Portuguese  ^^^^^  ^^^^^  westward  and  discovered  Brazil  with  its 

Success  and  vast  and  Varied  wealth.  But  the  avarice  and  greed 
of  the  Portuguese,  their  monopolistic  spirit,  their 
oppression  of  other  merchants  who  were  their  best  customers, 
and  their  generally  narrow  and  short-sighted  policy,  together 
with  their  neglect  to  provide  for  the  defense  of  their  colonies 
and  trade  possessions,  soon  brought  about  their  downfall.  By 
1580  the  Portuguese  commerce  in  the  East  had  seriously  de- 
clined, and  in  that  year  the  crown  was  united  with  that  of  Spain 
under  Phillip  11.  This  union  of  the  two  countries  continued 
until  1640,  when  they  again  separated,  but  since  that  date 
Portugal  has  been  too  weak  and  impoverished  to  achieve  any 
distinction  in  commerce. 

The  Spaniards  of  the  sixteenth  century  were  great  explorers 
and  discoverers,  but  their  conquests  were  usually  inspired  by  an 
inordinate  thirst  for  gold  and  not  for  commercial  advantages. 
They  were  singularly  lacking  in  the  commercial  faculty,  and 


SPAIN.  49 

despised  the  industries.  They  not  only  neglected  and  failed  to 
build  up  the  waning  Portuguese  commerce  in  the  East,  but  soon 
became  involved  in  a  war  with  the  Dutch,  which 
Commerce  ^^^  ^^^  mcaus  not  Only  of  destroying  a  consider- 

able portion  of  their  own  and  the  Portuguese 
fleet,  but  also  of  driving  the  Dutch  into  the  commerce  of  India 
which  the  Portuguese  had  once  so  jealously  kept  to  themselves. 

By  means  of  discoveries  in  the  new  world,  under  the  patron- 
age of  Ferdinand  and  Isabella,  by  Columbus,  Cabot  and  son  and 
Ponce  de  Leon,  and  the  inhuman  conquests  of  Mexico  by  Cortez, 
of  Peru  by  Pizarro,  and  of  Chili  by  Almagro,  all  of  which  are 
embraced  within  a  period  of  fifty  years  in  the  last  part  of  the 
Extent  of  fifteenth  and  early  part  of  the  sixteenth  centuries, 

Spanish  nearly  the  whole  of  the  Western  Hemisphere  came 

ommions  under  the  control  of  Spain,  and  so  remained  for 

almost  a  hundred  years.  Besides  crushing  out  in  Mexico  and 
Peru  a  civilization  which  might  have  instructed  Spain,  and 
practicing  the  most  atrocious  barbarities  upon  millions  of  inno- 
cent human  beings  for  greed  of  gold,  and  in  the  name  of  religion, 
Spain  did  almost  nothing  towards  developing  the  resources  of 
this  new  world. 

Not  only  did  Spain  possess  a  monopoly  of  the  Western  Hemi- 
sphere at  the  beginning  of  the  sixteenth  century,  but  also  con- 
trolled a  large  portion  of  Europe,  including  what  is  now  the 
empire  of  Germany,  the  Netherlands,  Burgundy,  Sicily,  and 
Milan,  Tunis  and  Oran,  together  with  the  Canary  and  Cape 
Verde  Islands  in  Africa,  and  the  Philippines  and  other  posses- 
sions in  Asia.  Immense  in  extent  and  of  incalculable  richness 
as  were  her  dominions,  yet  the  most  fertile  and  promising 
regions  were  despised  unless  they  immediately  gave  promise  of 
gold  or  silver  in  large  quantities  to  satisfy  Spanish  greed  and 
luxury. 

Spain  pursued  the  most  selfish,  narrow  and  short-sighted 
policy  towards  her  colonies,  seeming  to  regard  them  as  proper 


50  HISTORY    OB^    COMMERCE. 

subjects  to  be  bled  and  fleeced  for  the  enrichment  of  the  home 
country.  She  farmed  the  revenues  to  local  governors,  who,  hav- 
s  anish  ^^S  P^^^  ^^®  required  sum  to  the  crown,  in  turn 

Colonial  enactcd  an  enormous  increase  by  oppressive  taxes 

^°^^^y  on  the  people  levied  in  every  conceivable  form. 

Few  harbors  were  established,  manufacturing  was  not  only  dis- 
couraged but  actually  forbidden,  as  was  also  the  raising  of  all 
European  products.  Natives  and  Colonists  were  forced  by  every 
device  to  purchase  from  the  mother  country  all  manufactured 
articles,  and  her  colonies  were  regarded  as  markets  for  the 
goods  of  the  mother  country.  The  inhuman  treatment  of  the 
natives  was  in  accord  with  the  general  spirit  of  Spanish  colonial 
policy.  In  1532  the  silver  mines  of  Zacatecas,  Mexico,  were 
opened,  and  about  the  same  time,  extensive  mines  in  Peru.  The 
native  Indians  were  employed  to  work  these  mines,  and  were  so 
cruelly  treated  that  nearly  all  of  them  died,  so  that  slaves  from 
Africa  had  to  be  exported  to  fill  their  places.  With  appalling 
atrocity  the  Spaniards  proceeded  to  confiscate  the  lands  and 
goods  of  the  natives  and  infiict  upon  them  every  form  of  cruelty 
and  oppression. 

The  same  year  in  which  Columbus  discovered  America  wit- 
nessed one  of  the  most  melancholy  events  in  Spanish  history, 
and  one  which  seriously  affected  the  prosperity  of  the  country — 
the  expulsion  of  the  Moors.  When  the  Moorish  kingdom  of 
Grenada,  after  a  war  of  ten  years,  fell  before  the  soldiers  of 
Ferdinand  and  Isabella,  the  Mohammedans  were  allowed  no 
alternative  but  to  leave  their  country  or  embrace  Christianity. 
Many  chose  the  former  course,  while  others,  with  inward  repug- 
nance, yielded  obedience,  but  were  driven  by  the  cruelty  of  the 

inquisition  to  repeated  rebellion,  by  which  their 
ttiTMoors°*        condition  was  always  rendered  worse  than  before. 

They  were  finally  commanded  to  renounce  even 
their  language,  dress  and  customs,  and  800,000  Moors,  men  and 
women,  old  men  and  children,  left  the  land  of  their  birth,  their 


SPAIN.  51 

blooming  fields  and  the  houses  they  had  built,  and  where  their 
ancestors  had  lived  for  eight  hundred  years.  The  flourishing 
plains  of  the  south  of  Spain  soon  became  a  desert,  agriculture 
decayed  and  trade  stagnated;  prosperous  villages  were  reduced  to 
ruins,  towns  once  animated  by  commerce  became  depopulated, 
poverty,  dirt  and  sloth  took  possession  of  the  once  rich  and 
happy  country,  the  departed  splendor  of  which  is  still  attested  by 
such  magnificent  ruins  as  the  Alhambra. 

A  fate  similar  to  that  of  the  Moors  was  visited  upon  the 
Jews*,  while  priests  and  courtiers  divided  the  treasures  of  the 
banished.  The  Jews  were  the  most  diligent  and  skillful  work- 
men in  Spain,  and  their  banishment,  together  with  that  of  the 
Moors,  left  the  country  impoverished  in  every  branch  of  trade 
and  industry.    The  Spaniards  were  unable  to  supply  the  articles 

which  the  silver  of  Peru  would  purchase,  and 
uidi^rtriir''         hence  the  Spanish  gold  and  silver  which  flowed  in 

from  their  conquests  and  discoveries  went  to  the 
markets  of  the  Netherlands  and  England,  there  to  be  exchanged 
for  linen  and  woolen  cloth,  manufactured  metals,  English  woolen 
fabrics,  and  timber  for  ship-building.  English,  Dutch  and  Ger- 
man merchants  brought  the  articles  which  Spain  needed,  and 
carried  home  in  return  gold,  silver,  pearls  and  wine. 

Now  observe  how  this  fortunate  condition  of  affairs,  this 
profitable  trade  with  England  and  other  northern  countries, 
was  interfered  with  and  broken  up  by  Spain  herself.  During  the 
sixteenth  century  religious  zeal  and  fanaticism  were  very  active 
in  Spain,  and  the  Inquisition  spread  terror  to  all  heretics. 
Philip  II  conceived  an  ambition  to  invade  England,  dethrone 
Elizabeth,  and  restore  the  Catholic  religion  which  had  been 
abolished  by  Elizabeth's  father  and  predecessor,  Henry  VIII. 
For  this  purpose,  in  1588,  he  fitted  out  the  greatest  fleet  of  the 
century,  and  gave  it  the  boastful  name  of  the  "Invincible  Ar- 

*In   the   spring  of  1492   the  Jews,   to   the   number  of  one   hundred   and 
sixty  thousand,  according  to  Prescott,  were  expelled  from  the  kingdom. 


53  HISTORY    OP    COMMERCE. 

mada.'^  With  this  he  attacked  the  English  squadroji  off  the 
south  coast  of  England,  resulting  in  the  loss  by  destruction  and 
capture  of  the  entire  Spanish  fleet.  This  conflict  destroyed  the 
At  War  with  commercc  between  Spain  and  England,  and  the 
the  English  lattci   bcgau    to   make    preparations   at   once    to 

and  Dutch  embark  in  American  commerce  and  colonization 

on  her  own  account,  with  the  result  that  the  first  permanent 
English  colony  was  planted  in  Virginia  nineteen  years  later. 
From  that  date  Spanish  interests  in  the  western  world  began 
to  decline.  Her  colonies  revolted  early  in  the  nineteenth  cen- 
tury and  several  of  them  acquired  their  independence.*  Cuba 
in  1868  attempted  to  throw  off  the  yoke  of  Spanish  oppression, 
but  failed.  In  1895  another  attempt  was  made,  resulting  in  a 
bloody  war  of  nearly  five  years,  during  which  the  American 
warship,  Maine,  was  blown  up  in  Havana  harbor.  This  overt 
act  gave  the  United  States  the  desired  opportunity  to  assist  the 
Cubans,  and  led  to  the  Spanish- American  war  which  freed  Cuba 
in  1899,  and  resulted  in  Porto  Eico  and  the  Philippine  Islands 
being  ceded  to  the  United  States.  Now  only  the  Canary  Islands 
and  two  small  provinces  of  doubtful  value  on  the  west  coast  of 
Africa  remain  as  the  residue  of  Spain's  vast  possessions. 

Equally  unnecessary  and  unwise  was  the  breach  between 
Spain  and  the  Dutch.  The  Netherlands  were  Spanish  territory, 
and  the  Dutch  were  Spain's  best  customers.  Their  ships  were 
in  the  habit  of  going  to  Lisbon  for  their  cargoes  of  eastern 
goods,  but  the  fanatical  Philip  II  undertook  to  force  the  Roman 
Catholic  religion  upon  them,  and  at  his  persecutions  they  re- 
volted. He  then  closed  the  port  of  Lisbon  against  their  ships, 
and  their  alternative  was  to  either  give  up  their  eastern  trade  or 
go  to  India  for  the  goods  themselves.  They  were  too  enterpris- 
ing to  do  the  former,  and  hence  was  begun  the  commerce  of 

♦Mexico  became  independent  in  1822;  Peru,  1824;  Chili,  1826;  Colombia, 
1820;  Ecuador,  1830;  Bolivia,  1825;  Venezuela,  1831;  Uruguay,  1825;  Argen- 
tine Republic,  1810;  Paraguay,  1814;  Cuba,  1899;  Puerto  Rico  and  the 
Philippines  were  ceded  to  the  United  States  in  1899. 


THE    DUTCH.  53 

the  Dutch  in  India,  while  at  the  same  time  they  joined  their 
forces  with  England  in  the  effort  to  destroy  the  Spanish  fleet. 

The  commercial  history  of  Holland  rivals  in  interest  that  of 
Venice,  and  those  indefatigable  people  achieved  a  commercial 
importance  in  the  sixteenth  and  seventeenth  centuries  which  en- 
titles them  to  a  prominent  place  in  history.  Their  lands  are 
below  the  level  of  the  sea,  on  the  northwest  coast  of  Europe, 
and  were  reclaimed  from  the  sea  by  building  immense  dykes. 
Year  after  year  and  generation  after  generation  this  sturdy  and 
indomitable  people  fought  back  the  sea,  and  the  soil  being  but 
a  sediment  of  mud,  under  their  careful  cultivation,  became  a 
fertile  garden.  They  were  a  nation  of  agricultur- 
andcharacter  ^^^^'  manufacturers  and  merchants.  Abstemious 
and  self-denying  to  a  degree,  they  handled  the 
products  of  the  East  as  merchants,  but  denied  themselves  the 
use  of  luxuries.  At  the  time  of  Philip  II  they  had  already 
become  one  of  the  richest  and  most  prosperous  provinces  in 
Europe.  Their  thrift  was  unsurpassed.  Their  cities  of  Antwerp, 
Amsterdam  and  Eotterdam  were  the  commercial  centers  of 
northern  Europe.  These  cities  had  been  the  seat  of  considerable 
manufacturing  during  the  middle  ages.  Woolen  and  linen  goods 
were  the  chief  products.  The  first  optical  instruments  and  the 
pendulum  clock  came  from  Holland.  The  art  of  printing 
and  book-binding  had  been  carried  to  a  high  state  of  perfection. 
Dutch  ships  had,  centuries  before,  traded  at  the  ports  along 
the  shores  of  the  Baltic  Sea  and  distributed  the  products  received 
from  Venetian  merchants.  Gradually  the  Dutch  had  built  up 
extensive  fisheries,  until  at  one  time  the  herring  fisheries  of 
Holland  gave  employment  to  60,000  men.  In  1614  a  company 
was  organized  for  the  special  purpose  of  engaging 
merM^t^Ho'me  ^^  whalc  fishing.  At  the  beginning  of  the  seven- 
teenth century  (1600)  the  carrying  trade  of  Europe 
was  practically  all  in  the  hands  of  the  Dutch.  They  also  pos- 
sessed a  monopoly  of  the  ship  building  industry,  and  nearly  every 


54  HISTORY    OF    COMMERCE. 

country  of  Europe  had  its  ships  built  in  Holland.  Agriculture 
and  cattle  raising  flourished  extensively  at  this  time,  and  to- 
gether with  its  manufacturing  industries  placed  the  country  in  a 
most  pDosperous  condition. 

Having  broken  off  with  Spain,  the  Dutch  immediately  turned 
their  attention  toward  the  commerce  of  the  East.  A  number  of 
merchants  combined  to  fit  out  ships  for  the  long  voyage,  and 
the  venture  proving  highly  successful,  the  great  Dutch  East 
Dutch  Com-  India  Company  was  formed  in  1602,  with  a  charter 
merce  in  the  f rom  the  government.  This  company  was  the  pat- 
tern of  all  future  Dutch,  French  and  English 
companies,  and  had  authority  to  take  possession  of  newly  dis- 
covered land,  make  war  or  peace  with  the  natives  or  other  in- 
habitants, erect  forts,  establish  garrisons,  and  appoint  adminis- 
trative and  judicial  officers.  Fierce  and  bloody  conflicts  with 
the  Portuguese  in  India  and  the  far  East  ensued,  but  with  the 
help  of  the  natives  the  Dutch  drove  them  from  Malacca  in  1651 
and  from  Ceylon  in  1658.  Java,  Bantam,  Amboina,  Ternate 
and  the  Banda  Islands  were  opened  up  to  Dutch  commerce,  and 
even  a  slight  footing  in  Japan  was  secured.  In  1660  the  Dutch 
conquered  Celebes,  one  of  the  last  possessions  of  the  unfortunate 
and  misgoverning  Portuguese.  With  this  extensive  commerce 
flowing  directly  into  Holland,  the  Dutch  grew  in  wealth  at  a 
wonderful  pace.  Amsterdam  became  the  Venice  of  the  North 
and  the  great  banking  exchange  for  Europe. 

Having  thus  established  a  rich  and  successful  empire  in  the 
East,  whose  gains  provided  the  means  for  further  expansion,  the 
Dutch  began  to  turn  their  attention  to  the  Western  hemisphere. 
They  fitted  out  several  exploring  expeditions,  and  one  of  these, 
in  charge  of  Hendrik  Hudson,  an  agent  of  the 
hl'the  wlst'^^  Dutch  East  India  Company,  bent  on  finding  a 
western  passage  to  India,  sailed  into  New  York 
harbor  in  1609  and  discovered  the  river  which  bears  his  name. 
Five  years  later  the  Dutch  built  a  fort  on  Manhattan  Island, 


THE    DUTCH.  55 

which  they  purchased  from  the  Indians  for  a  sum  equivalent  to 
$24  in  our  currency,  and  named  the  settlement  New  Amsterdam. 
In  1612  the  Dutch  took  possession  of  a  number  of  the  West 
India  Islands  and  established  a  colony  in  Guiana,  South  America. 
Their  western  commerce  was  increasing,  and  anticipating  that  it 
might  equal  or  surpass  their  trade  with  the  East,  they  formed 
the  "West  India  Company,  which,  however,  proved  anything  but 
successful  financially. 

The  colonial  policy  of  the  Dutch  was  of  the  oppressive  and 
monopolistic  character,  similar  in  many  respects  to  that  of 
Portugal  and  Spain,  and  the  prosperity  of  their  colonies  was 
not  permanent.  England  came  forward  about  the  middle  of  the 
seventeenth  century  as  a  rival  to  the  Dutch  in  foreign  commerce, 
and  passed  a  series  of  statutes  in  1651  and  1660,  called  the 
Navigation  Acts,  aimed  at  Dutch  commerce.  These  brought  on 
a  short  but  severe  war  with  England,  which  resulted  disastrously 
for  Holland.  During  this  conflict  the  English  forcibly  took 
possession  of  New  Amsterdam  and  converted  it  into  an  English 
colony,  changing  the  name  to  New  York.  With  the  progress 
of  England  and  France  the  commercial  power  of  Holland  de- 
clined. The  Norwegians  competed  with  them  in  the  fisheries, 
the  Germans  in  the  trade  of  central  and  southern  Europe,  and 
Holland  became,  and  has  since  remained,  secondary  in  point  of 
commercial  importance. 


CHAPTER  VI. 

COMMERCE  OP  GERMANY. 

HANSEATIC  LEAGUE;  EFFECT  OF  THIRTY  YEARS'  WAR;   REVIVAL 
OF  GERMAN  COMMERCE;  ZOLLVEREIN;  PRESENT  COMMERCE. 

In  order  to  better  understand  the  commerce  of  Germany 
we  must  go  back  a  little  in  point  of  time  to  the  middle  ages, 
and  glance  at  the  civilization  and  commerce  which  had  grown  up 
in  the  north  of  Europe.  In  the  time  of  Charlemagne  (768-814) 
there  were  a  number  of  important  trading  towns 
Hansa  Towns  established,  which  grew  into  local  centers  of  com- 
merce. These  began  with  Bruges  in  Flanders  and 
one  or  two  Rhine  cities  in  the  west,  and  were  scattered  through 
what  is  now  Germany  and  Austria  and  along  the  coast  of  the 
Baltic  Sea  as  far  as  Russia.  Many  of  these  towns  later  organized 
themselves  into  small  republics,  after  the  manner  of  the  Italian 
cities,  for  self-protection  against  the  territorial  lords,  who,  under 
the  Feudal  system,  ruled  and  plundered  the  country  about  them. 
Then  in  order  to  protect  themselves  from  common  enemies, 
such  as  the  predatory  inroads  of  barbarians  and  Turks,  and  the 
pirates  which  infested  the  seas — chiefly  the  Northmen  who 
swarmed  in  the  North  and  Baltic  Seas — they  formed  themselves 
into  one  grand  combine,  called  the  Hanseatic  League.  They 
used  the  power  thus  acquired  for  gaining  greater  security  for 
their  commerce. 

The  commerce  of  Europe  during  the  middle  ages  may  be  said 

to  have  been  divided  into  two  great  dominions, 

LeagS"^^^***^      '^^^•'  ^^^  commercial  cities  of  Italy  in  the  south 

of  Europe  and  the  Hansa  towns  in  the  North.  The 

connecting  links  between  these  two  commercial  domains  were 

the  highways  built  chiefly  by  the  Romans,  and  more  especially 

66 


THE    HANSA.  67 

the  rivers  Ehine,  Danube,  Elbe  and  other  waterways. 
The  centers  of  the  Hanseatic  League  were  Lubec  on  the  Baltic 
Sea,  and  Hamburg  and  Bremen  on  the  other  side  of  the  Cimbric 
peninsula.  Later  they  were  joined  by  Brunswick,  Dantzig,  Mun- 
ster,  Magdeburg  and  the  ancient  city  of  Cologne.  The  nobles 
tried  to  obstruct  the  formation  of  this  league,  which  was  in  a  great 
measure  designed  to  withstand  their  exactions,  but  without  avail, 
and  in  1300  there  were  eighty  cities  in  the  confederation,  stretch- 
ing from  Belgium  to  the  gulf  of  Finland.  The  towns  were 
divided  into  four  colleges  or  districts,  of  which  Lubec,  Cologne, 
Brunswick  and  Dantzig  were  the  centers.  The  capital  of  the 
confederation  was  Lubec,  and  there,  once  in  three  years,  meet- 
ings or  congresses  called  "Diets"  were  held  of  delegates  from 
all  the  various  towns  of  the  confederation.  At  these  congresses 
the  commercial  interests  of  the  various  districts  were  discussed 
and  ways  and  means  provided  to  improve  the  general  state  of 
Proceedings  of  ^^adc,  chicfly  by  affording  security  to  property, 
the  Hanseatic  The  Mghways  had  been  infested  with  robbers,  who 
ongresses  plundered  wagon  trains  of  their  cargoes  as  they 

proceeded  through  the  country,  or  dragged  innocent  travelers 
into  captivity  and  held  them  for  ransom.  These  depredations 
were  chiefly  instigated  by  princes  and  nobles  who  inhabited 
strongly  fortified  castles  upon  almost  inaccessible  rocks,  and 
lived  in  ease  and  profligacy  by  means  of  their  piracy  upon  com- 
merce, both  land  and  sea.  In  order  to  resist  this  wholesale 
robbery  the  congress  required  each  town  to  furnish  its  quota 
of  men  and  money  for  the  general  defense  and  punishment  of 
offenders  both  by  land  and  sea,  and  in  addition  to  this  to  main- 
tain a  militia  of  both  cavalry  and  infantry  proportionate  to  its 
size  or  population.  These  were  armed  with  cross  bows,  battle 
axes,  maces  and  lances.  The  martial  spirit  was  kept  up  by 
reviews.  In  addition  to  the  regular  militia,  the  larger  towns 
employed  mercenary  troops,  the  whole  amounting  to  almost  an 
army.     Thus  peace  and  security  were  secured  largely  through 


58  HISTORY    OF    COMMERCE. 

the  administration  of  the  congress  at  Lubec,  and  as  ^  result,  an 
astonishing  success  marked  the  history  of  Hansa  commerce. 
Under  direction  of  the  congress  agents  were  appointed  in  the 
different  Hansa  towns,  with  the  special  view  of  developing  for- 
eign commerce.  Agencies  were  opened  in  new  territory,  and 
some  of  these  afterward  became  permanent  settlements,  as  Lon- 
don, England,  and  Novgorod,  Eussia.  In  order  to  improve  the 
money  systems  prevailing,  mints  were  established,  in  several  of 
the  important  towns,  and  although  no  uniform  system  of  coin- 
age was  in  use  the  coins  of  several  towns  were  current  through- 
out a  large  extent  of  territory. 

The  proceedings  of  the  Hansa  congress  are  interesting  on 
account  of  it  being  the  first  purely  representative  body  ever 
convened  for  commercial  purposes,  and  are  especially  valuable 
as  indicating  the  beginning  of  the  idea  of  co-operation  among 
peoples  having  diverse  interests.  There  can  be  no  doubt  but 
these  deliberations  were  highly  beneficial  in  promoting  civiliza- 
tion as  well  as  commerce,  for  we  find  from  about  the  middle  of 
the  fourteenth  century  evidence  of  a  general  improvement  and  a 
rapid  increase  in  wealth.  By  this  union,  piracy  was  driven 
almost  wholly  from  the  North  and  Baltic  Seas  and  compelled  to 
seek  its  prey  on  the  shores  of  France  or  Britain;  the  vehicle  and 
caravan  trade  by  land  was  protected,  and  a  general  spirit  of 
order  began  to  prevail  throughout  central  Europe,  affording 
Effects  of  the  Security  to  property  and  promoting  intercourse 
Hanseatic  amoug  the  pcoplc,  thus  beginning  the  dawn  of  that 

eague  intellectual  and  commercial  awakening  which  was 

to  follow  the  night  of  the  dark  ages  of  lawlessness  and  ignorance. 
The  result  was  seen  in  the  improvement  in  agriculture  and 
manufacture  all  over  central  Europe,  and  even  in  adjoining 
countries.  Fields  were  cultivated  where  forests  stood  before. 
Towns  and  villages  sprang  up  where  huts  were  located.  People 
began  to  discard  the  use  of  the  skins  of  bears  and  wolves  for 
clothing,  and  to  substitute  woolen,  cotton  and  silk  cloth.     The 


Longitude  West  from  Greenwich  10° 


Longitude 


50 


from 


'  30° 


GEHMANY.  59 

League  exerted  its  power  and  influence  to  protect  shipwrecked 
sailors  from  murder,  a  barbarity  which  had  been  all  too  common 
before.  It  passed  navigation  laws,  and  improved  the  art  of  ship- 
building. Its  good  work  continued  until  the  Thirty-years'  war 
(1619-1648)  prostrated  the  commerce  and  industries  of  Germany, 
and  then  its  functions  gradually  ceased,  after  having  rendered 
inestimable  service  to  the  cause  of  commerce  in  mediaeval  and 
modern  Europe. 

Passing  over  the  history  of  Germany  prior  to  the  Thirty- 
years  war,  a  history  of  wars,  feuds,  successions  and  religious 
contentions,  we  find  the  country  at  the  close  of  that  conflict 
almost  depopulated  in  its  rural  districts,  its  commerce  destroyed, 
German  Com-  its  people  burdened  with  taxes,  and  its  territory 
ThTrtyv'earr  divided  iuto  a  multitude  of  small  states.  This 
War  war  had  been  one  of  religion,  and  was  character- 

ized by  all  of  the  bitterness  which  usually  accompanies  religious 
disputes.  The  only  cities  that  survived  the  general  ruin  were 
Lubec,  Hamburg  and  Bremen,  and  these  had  suffered  severely. 
Seeing  the  decline  of  their  commerce,  these  latter  two  cities  took 
up  new  lines  of  trade  and  kept  up  an  active  commerce  with  west- 
ern Europe,  providing  the  whole  of  North  Germany  with  foreign 
and  colonial  products,  while  Lubec  continued  to  be  the  chief  sea- 
port of  the  Baltic  trade.  Little  progress  was  made  by  Germany 
in  commerce  or  the  industries  during  the  next  hundred  years, 
owing  to  its  continual  wars  with  France,  Spain  and  other 
nations.  Nearly  all  of  the  articles  then  considered  as  luxuries 
by  the  people,  such  as  silk,  glass,  porcelain  and  gloves,  were 
either  imported  from  England  or  France  or  manufactured 
through  government  aid.  The  spinning  and  weaving  of  linen, 
however,  was  engaged  in  to  a  considerable  extent,  as  well  as  the 
manufacture  of  woolen  cloth.  Prussia  endeavored  to  encourage 
the  revival  of  the  arts  and  industries  by  importing  artisans. 
Gradually  agriculture  and  cattle  raising  increased  to  a  consider- 
able extent  in  the  most  fertile  districts  and  a  small  export  trade 
grew  up. 


60  HISTORY    OF    COMMERCE. 

About  the  middle  of  the  eighteenth  century  (1750)  commerce 
showed  a  decided  awakening,  and  it  became  necessary  to  im- 
prove the  banking  and  commercial  facilities  of  the  country. 
Banks  and  trading  companies  were  organized,  and  roads,  canals 
and  harbors  were  built.  Manufactures  multiplied,  and  the  volume 
Revival  of  °^  ^^®  exports  and  imports  was  greatly  augmented. 

German  The  cousumptiou  of  coffce,  tea,  rice  and  tobacco 

Commerce  largely  increased,  and  the  liberality  of  the  German 

court  encouraged  the  importation  of  luxuries.  Hamburg  han- 
dled the  bulk  of  the  imports  from  England  and  farther  coun- 
tries, and  Bremen  wheat  from  France.  The  Rhine  and  the  Elbe 
became  great  highways  of  commerce  again,  and  the  towns  on 
their  banks  once  more  began  to  grow  and  prosper.  Each  city 
usually  developed  some  peculiar  industry.  Thus  Cologne  mo- 
nopolized the  trade  in  Rhine  wines;  Leipsig  the  publishing  and 
book-selling  trade;  Frankfort-on-the-Main  was  the  chief  finan- 
cial center  of  North  Germany.  Thus  we  see  that  by  the  middle 
of  the  eighteenth  century  Germany  had  reached  a  high  degree 
of  prosperity  and  commercial  importance.  Then  came  the  war 
of  the  American  Revolution,  which  made  a  demand  for  German 
products  in  England,  and  this  was  followed  soon  after  by  the 
French  Revolution  and  the  Napoleonic  wars,  so  that  large  quan- 
tities of  German  agriculture  and  manufactured  products  were 
exported  and  the  country  continued  prosperous  until  it  fell 
under  the  iron  heel  of  the  Great  Napoleon. 

Immediately  upon  the  invasion  and  subjugation  of  Germany 
by  Napoleon  in  1805,  he  issued  a  decree  that  no  more  wheat 
should  be  sold  or  shipped  to  England.  This  lost  Germany  a 
good  customer.  Under  Napoleonic  rule  (1805-1815)  German 
ports  were  in  a  state  of  semi-blockade,  but  this  was  not  an  un- 
mixed evil,  for  it  caused  the  people  to  turn  their  attention  to 
raising  many  products  which  they  had  heretofore  imported. 
The  war  in  America  had  cut  off  the  supply  of  tobacco,  and  now 
its  cultivation  was  begun  and  continued  very  successfully.    Many 


THE    ZOLLVEREIN.  61 

of  the  raw  products  heretofore  imported  to  supply  the  factories 
of  Germany  and  for  home  consumption  had  now  to  be  raised  at 
Deveio  ment  homc.  Flax  was  largely  grown;  beets  were  raised 
of  Home  and  the  beet  sugar  industry  commenced.     Cotton 

Industries  ^^^   ^^^l  ^^^  ^^^  home  mills   were   extensively 

produced,  and  the  manufacture  of  cloth  was  given  a  new 
impetus.  German  mines  so  rich,  were  developed  especially  in 
iron,  coal  and  silver,  and  the  people  learned  to  rely  upon  and 
develop  the  resources  of  their  own  country.  Now  that  the 
American  colonies  had  become  independent  and  England  no 
longer  enjoyed  a  monopoly  of  their  trade,  a  considerable  com- 
merce sprang  up  between  them  and  Hamburg  and  Bremen. 
These  cities  continued  to  reach  out  after  the  commerce  of  the 
world  with  characteristic  enterprise,  and  their  ships  carried  on  a 
profitable  trade  with  the  West  Indies  and  South  America. 

After  the  abdication  of  Napoleon  in  1815  peace  returned  to 
Europe,  and  German  ports  were  thrown  open  to  the  manu- 
factured products  of  England.  The  English  had  more  improved 
machinery  and  were  able  to  turn  out  goods  at  less  cost  than  the 
factories  of  Germany.  As  a  result  English  goods  flooded  the  Ger- 
man markets,  and  for  a  time  produced  a  general  depression  and 
stagnation  in  the  industries  of  Germany.  Hard  times  prevailed, 
the  cotton,  iron  and  steel  industries  especially  being  depressed. 
To  remedy  the  difficulty,  tariff  laws  were  enacted.  Germany 
at  that  time  was  a  loose  confederation  of  independent  states, 
and  hence  there  was  very  little  uniformity  in  the  tariff  laws. 

Several  states  would  form  themselves  into  a  league 
The  zoiiverein      ^ud  cuact  Uniform  tariff  laws,  then  other  leagues 

of  states  were  formed,  and  finally  after  several 
years  the  tariff  laws  became  uniform  through  the  efforts  of  the 
Customs  Union  or  Zoiiverein.  Treaties  of  commerce  were  made 
by  the  Zoiiverein  with  England,  France  and  other  European 
countries,  and  the  industries  of  Germany  became  prosperous 
again. 


62  HISTORY    OF    COMMERCE. 

By  the  year  1830  the  revival  of  trade  and  industries  in  Ger- 
many had  fully  set  in.  New  machinery  had  replaced  old  meth- 
ods in  the  silk,  woolen  and  cotton  factories,  and  now  woolen 
goods  formed  a  very  important  part  of  the  export  trade.  Iron 
and  steel  industries  sprang  up,  incident  to  the  advent  of  the 
age  of  machinery.  Glass,  paper,  pottery,  porcelain  and  hardware 
Revival  of  became  extensive  products,  as  well  as  chemicals, 

German  dycs,  sugar  and  beer,  all  of  which  were  largely 

Commerce  exported.     After  the   Franco-Prussian  War,  the 

German  states  including  Prussia  were  united  into  a  compact 
government,  and  King  William  was  crowned  Emperor  of  Ger- 
many in  the  Palace  at  Versailles.  This  event  brought  unity  to  an 
incoherent  collection  of  petty  states,  and  under  the  skillful 
leadership  of  Prince  Bismarck  the  new  empire  has  steadily 
grown  in  power  and  influence  until  it  now  ranks  as  the  second 
nation  of  Europe  in  wealth  and  commercial  importance.  Ger- 
many is  rapidly  changing  the  character  of  her  industries  and 
becoming  a  manufacturing  and  commercial^  rather  than  an 
agricultural  nation. 

In  the  past  fifty  years  the  manufactures  of  Germany  have 
nearly  doubled,  its  commerce  trebled,  its  shipping  increased 
five  fold,  and  its  mining  six  fold.  Her  production  of  iron  has 
The  Present  increased  ten  fold  in  fifty  years.  Her  mines  give 
Commerce  of  employment  to  over  a  half  million  men.  By  the 
ermany  ^^^  ^^  labor-saviug  machines  one  man  can  now 

produce  as  much  as  three  men  could  produce  fifty  years  ago. 
Germany  has  750  factories  devoted  to  the  making  of  machinery 
alone.  One  of  these,  the  Krupp  Gun  Works  at  Essen,  is  the 
largest  in  the  world,  employing  20,000  men  and  covering  a 
space  of  one  thousand  acres.  Hamburg  and  Bremen  still  lead 
as  ports  of  entry.  Dantzig  is  the  chief  seat  of  its  great  export 
trade  in  timber,  grain,  flax,  hemp  and  potatoes.  Leipsig  is  the 
greatest  fur  market  in  the  world,  and  the  seat  of  the  book 
publishing  trade.     Frankfort   as   a  financial  center  has  been 


THE  ZOLLVEREIN.  63 

compelled  to  take  a  place  second  to  the  capital,  Berlin.  Dresden 
is  noted  for  its  porcelain  and  Nuremburg  for  its  clocks  and 
watches. 

Germany  has  given  considerable  attention  to  the  practical 
education  of  her  people,  especially  in  the  field  of  commercial 
education.  Her  commercial  success  is  no  doubt  attributable 
in  a  large  degree  to  her  system  of  education.  Her  artisans  are 
not  only  skilled  in  their  trades,  but  a  large  proportion  of  them 
are  men  of  high  scientific  attainments  in  the  branches  pertaining 
to  their  work.  Since  the  learned  professions  and  official  positions 
are  the  exclusive  preserves  of  those  born  to  social  rank,  the 
educated  commoner  must  of  necessity  betake  himself  to  manu- 
facture, trade  or  commerce,  and  it  follows  that  much  of  the  best 
brains  of  the  empire  is  devoted  to  business  pursuits. 


CHAPTEK  VII. 
COMMERCE  OF  FRANCE. 

FLEMISH   COMMERCE  AND   MANUFACTURES;  AGE  OF   LOUIS  XIV; 

COLONIAL  POSSESSIONS;  REVOCATION  OF  THE 

EDICT  OF  NANTES. 

Before  entering  directly  upon  the  history  of  French  com- 
merce, let  us  refer  briefly  to  a  small  country  called  Flanders, 
which  during  the  middle  ages  existed  and  flourished  directly 
north  of  France,  upon  the  shore  of  the  North  Sea,  occupying  a 
portion  of  what  is  now  Belgium.  We  have  already  had  occasion 
Commerce  and  ^^  allude  to  the  trading  ships  of  Venice  and  Genoa 
Manufactures  and  their  voyages  northward  along  the  coast  of 
France  as  far  as  Flanders.  Numerous  testi- 
monies are  found  in  history  as  to  the  flourishing  condition  of 
Flemish  manufactures  as  early  as  the  twelfth  century.  The 
weaving  of  woolen  cloth  was  their  most  important  industry,  and 
a  writer  of  the  thirteenth  century  asserts  that  "all  the  world 
was  clothed  from  English  wool  wrought  in  Flanders."  This  is 
an  exaggeration,  but  Flemish  woolens  were  probably  sold  wher- 
ever the  sea  or  a  navigable  river  permitted  them  to  be  carried. 
England  and  Spain  furnished  the  raw  wool  and  Flanders  worked 
it  up  into  cloth.  English  wool  was  superior  to  the  Spanish  for 
fine  cloths,  and  the  Spanish  wool  was  mixed  with  the  English  in 
the  production  of  medium  grades  of  cloth.  Bruges  and  Ghent 
were  the  two  chief  manufacturing  and  commercial  centers  of 
Flanders,  and  each  of  them  at  one  time  had  not  less  than  forty 
thousand  looms  constantly  at  work. 

Bruges  was  the  termination  of  the  route  down  the  Ehine 
from  Italy  and  the  East,  and  before  Lisbon  eclipsed  her,  through 
the  rise  of  Portuguese  commerce  and  discoveries,  was  the  chief 

64 


FRANCE.  65 

distributing  point  whence  cargoes  were  transhipped  for  the 
Hansa  towns.  Here  the  products  of  Asia  and  Africa^  as  well 
Flemish  ^^  Europe,  came  to  be  exchanged  for  the  woolens. 

Growth  and  vclvets,  silks  and  linen  fabrics  from  the  looms  of 

^''^^""^  Flanders   and  Netherland   cities.     In   the   latter 

part  of  the  fourteenth  century  Bruges  was  a  market  for  the 
traders  of  the  world,  and  we  are  told  that  "merchants  from 
seventeen  different  kingdoms  had  their  settled  domiciles  there, 
besides  strangers  from  almost  unknown  countries  who  repaired 
thither." 

The  reason  for  the  decadence  of  the  commerce  and  prosperity 
of  Flanders  may  be  found  in  a  combination  of  causes,  one  of 
which  was  that  England  gradually  established  manufacturing 
industries  of  her  own  and  began  to  weave  not  only  her  own 
cloth  but  that  of  other  nations,  thus  depriving  Flanders  of 
her  most  profitable  customers;  another  was  in  the  rise  and  com- 
petition of  the  Hansa  towns,  which  destroyed  the  monopoly  of 
Bruges  as  a  distributing  point  and  commercial  center;  the  growth 
of  Portuguese  commerce  which  transferred  the  distributing  cen- 
ter from  Bruges  to  Lisbon;  the  growth  of  Dutch  maritime  com- 
merce directly  with  India,  by  which  transhipment  of  cargoes  no 
longer  became  necessary  either  at  Bruges  or  Lisbon.  What  was 
lacking  to  complete  the  ruin  of  Flemish  commerce  and  manu- 
factures from  these  causes,  was  easily  furnished  near  the  close 
of  the  sixteenth  century  by  the  religious  wars  and  persecutions  of 
the  weak  and  narrow-minded  Philip  II.  Antwerp  drew  away  a 
portion  of  the  commerce  of  Bruges;  many  of  her  weavers  emi- 
grated to  England,  and  the  political  control  of  Flanders  passed 
to  Spain,  Austria  and  thence  to  France. 

French  commerical  history  may  be  said  to  begin  about 
the  period  of  Louis  XIV  (1643-1715),  about  the  middle  of  the 
seventeenth  century,  for  prior  to  that  time  the  industries  and 
commerce  of  the  natioti  were  in  a  very  backward  state.  French 
merchants  had,  for  a  century  before,  been  trading  in  a  small 


CG  HISTORY    OF    COMMERCE. 

way  along  the  west  coast  of  Africa,  and  French  colonies  had 
been  planted  in  Madagascar  and  some  of  the  islands  adjacent 

thereto.  The  French  had  also  made  some  efforts 
commercr^        to  establish  a  footing  in  India,  and  in  1624  the  great 

French  East  India  Company  was  formed  for  the 
purpose,  but  later  it  was  driven  out  by  the  English.  The  French 
do  not  appear  to  have  been  navigators  or  explorers  like  the  Portu- 
guese or  Dutch,  and  except  in  North  America  were  never  very 
successful  as  colonizers.  Internal  commerce  in  France  was  like- 
wise in  a  neglected  and  undeveloped  condition  prior  to  the 
advent  of  Louis  XIV.  Silk  raising  and  weaving  had  been  carried 
on  to  a  limited  extent  during  the  sixteenth  century,  and  the 
manufacture  of  woolen  goods  spread  from  Flanders  into  north- 
ern France  and  along  the  banks  of  the  Ehine.  Agriculture  was 
very  much  neglected,  and  the  peasants  were  unmercifully  taxed 
to  support  an  extravagant  and  dissolute  nobility  and  maintain 
the  succession  of  wars  which  cursed  the  realm.  What  with  the 
Hundred-years  war  with  England  (1337  to  1453);  the  massacre 
of  the  Huguenots  on  St.  Bartholomew  night  (Aug.  24,  1572),  by 
which  100,000  persons  were  murdered  in  cold  blood;  the  perse- 
cutions of  the  Jews,  resulting  in  driving  thousands  of  industri- 
ous and  peaceable  citizens  from  France,  and  the  constant  strife 
and  commotion  which  prevailed,  is  it  any  wonder  that  commerce 
was  at  a  low  ebb? 

The  reign  of  Louis  XIV  has  been  called  the  Golden  Age 
of  France,  in  material  prosperity  as  well  as  in  art  and  literature. 
It  was  to  France  what  the  Elizabethan  age  had  been  to  England. 
Louis  XIV  was  called  the  Grand  Monarch,  and  such  he  proved 

to  be  in  many  respects,  displaying  remarkable 
Louis  ?iv  talents  as  a  ruler.     He  surrounded  himself  with 

men  who  merely  executed  his  will,  and  in  the 
choice  of  these  he  showed  rare  ability  and  judgment.  His  min- 
isters, especially  Colbert,  the  great  promoter  of  French  industry, 
manufactures  and  trades,  were  men  who  surpassed  the  statesmen 


FRANCE.  67 

of  most  other  countries  of  the  time.  Colbert's  activity  was 
unflagging.  He  set  himself  to  develop  the  country  on  every  side. 
He  especially  devoted  himself  to  building  up  manufactures  and 
commerce,  the  construction  of  routes  of  travel  by  both  sea  and 
land.  He  revived  old  manufactures  and  introduced  new- 
ones,  such  as  tapestries,  silk  mosaics,  cabinet  work,  lace, 
pottery,  steel  work,  and  the  like.  Fine  cloth  had  hitherto 
been  brought  from  England,  but  by  his  judicious  patronage  its 
manufacture  was  established  in  France.  By  encouraging  the 
growth  of  mulberry-trees  he  enabled  the  silk  manufacturers  to 
dispense  with  the  importation  of  raw  silk.  The  art  of  making 
plate  glass  was  imported  from  Venice,  and  the  name  "French 
plate  glass"  is  synonymous  with  excellence  to  this  day.  The  art 
of  carpet  weaving  he  introduced  from  Turkey  and  Flanders,  and 
in  these  the  French  soon  learned  to  excel  their  masters.  A  ma- 
chine for  weaving  stockings  was  introduced  from  England;  tin, 
steel,  porcelain  and  morocco  leather,  hitherto  brought  from 
foreign  countries,  were  now  manufactured  in  France. 

The  development  of  French  colonial  ambition  was  also  due 
largely  to  the  sagacity  and  labor  of  Colbert.  The  French  had  not 
been  very  successful  in  the  East,  but  Colbert  turned  his  attention 
to  the  more  promising  field  of  the  western  world.  Before  James- 
town was  built  or  the  Pilgrims  landed  at  Plymouth  Rock  the 
French  had  planted  feeble  colonies  in  New  Foundland  (1535) 
and  Nova  Scotia  (1602).  This  territory,  called  "Arcadia,"  was 
p^g„j.j^  ceded  to  England  by  the  treaty   of  Utrecht  in 

Colonial  1713.*     They    also    made    settlements    in    New 

Possessions  Brunswick  (1672)  and  Cape  Breton  Island  (1714), 

but  the  most  important   French   colony  was   that   of   Canada 

*0n  account  of  the  disloyalty  of  the  people  to  England,  which  amounted 
to  openly  assisting  the  French  in  the  wars  which  occurred  between  the 
two  nations,  the  people  of  Arcadia  were  inhumanly  punished  by  England  in 
1755.  Seven  thousand  of  them  were  forcibly  put  aboard  ships  and  trans- 
ported to  the  English  colonies,  where  they  were  scattered  around.  Their 
villages  were  burned  and  their  fields  destroyed. 


68  HISTORY    OF    COMMERCE. 

(1608)  which  lay  along  the  St.  Lawrence  with  its  post  of  Quebec. 
From  this  Frencji  missionaries  and  explorers  pushed  further 
west,  and  were  the  first  white  men  to  behold  the  Falls  of  Niagara 
and  explore  the  Great  Lakes.  Trading  posts  were  established 
by  them  in  the  region  around  the  Great  Lakes,  and  later  these 
became  centers  and  rallying  points  of  civilization.  Such  were  De- 
troit and  Chicago.  In  1673  Fathers  Marquette  and  Joliet  discov- 
ered the  Mississippi  Eiver  and  sailed  down  it  to  Arkansas.  Nine 
years  later  Eobert  de  La  Salle  completed  the  work  which  they 
had  begun  by  passing  down  the  river  to  its  entrance  into  the 
Gulf,  and  taking  possession  of  the  country  on  its  banks  and  at 
its  mouth  in  the  name  of  his  king,  in  whose  honor  he  nanied 
it  Louisiana. 

It  became  one  of  the  ambitions  of  Louis  XIV  to  glorify  his 
reign  by  creating  for  France  a  colonial  dominion  on  the  banks 
of  the  great  "Father  of  Waters"  which  would  rival  or  eclipse 
the  flourishing  colonies  of  England  on  the  Atlantic  coast.  Ac- 
cordingly several  expeditions  were  sent  out  from  time  to  time 
to  colonize  the  new  territory  of  Louisiana;  the  Mississippi  Com- 
pany was  formed  under  the  management  of  the  visionary  finan- 
cial theorist,  John  Law.  Money  was  lavished  upon  the  enter- 
prise, and  emigrants  were  sent  thither.  New  Orleans  was 
founded  and  settlements  made  up  the  river  as  far  as  the  present 
city  of  Natchez.  Upon  this  sickly  colony  and  previous  explora- 
tions the  French  laid  claim  to  the  whole  Mississippi  Valley  and 
the  vast  domain  stretching  away  to  the  northwest.*  But  the 
English  claimed  that  their  possession  of  the  Atlantic  seacoast 
carried  with  it  a  valid  title  to  the  country  in  the  interior  for 
an  indefinite  extent  westward.     In  conformity  with  this  idea 


*The  Louisiana  Territory  purchased  in  1803  by  the  United  States  from 
France  extended  northward  to  practically  the  boundary  line  of  British 
America.  This  boundary  was  somewhat  indefinite.  Thence  it  extended 
westward  to  the  territory  of  Oregon  and  took  in  the  whole  of  the  United 
States  west  of  the  Mississippi  river  except  Texas,  V^ashington,  Oregon, 
California  and  what  the  United  States  got  from  Mexico  by  treaty  and 
purchases. 


PRANCE.  69 

the  charters  of  several  of  the  English  colonies  read  to  include 
territory  stretching  across  the  continent  from  sea  to  sea.  This 
Contentions  was  the  basis  of  the  conflict  between  the  English 
between  Eng.       ^^^  French  colonies  in  America.     When  the  two 

Usn  ana  v  rencn 

Colonies  nations  were  at  peace,  the  controversy  led  only 

to  border  disputes,  but  when  England  and  France  were  at  war, 
their  respective  colonies  in  America  also  engaged  in  a  murder- 
ous conflict,  intensified  and  made  more  shocking  by  the  Indian 
element  enlisted  in  it.  A  plan  was  formed  by  the  French  to 
construct  a  line  of  forts  stretching  from  Lake  Erie  down  the 
Ohio  Elver,  and  thence  down  the  Mississippi  to  Louisiana,  thus 
hemming  in  the  British  settlement  on  the  east  of  the  Alle- 
ghaneys.  This  project  soon  brought  on  a  conflict  with  the  Ohio 
Company,  an  association  formed  in  London  and  Virginia,  which 
had  obtained  from  the  crown  a  large  tract  of  land  along  the 
Ohio  River,  where  it  had  erected  trading  posts.  George  Wash- 
ington, then  a  young  officer  in  the  militia  service,  was  sent  out  to 
warn  the  French  away.  Receiving  an  unsatisfactory  answer. 
General  Braddock  with  a  body  of  troops  was  later  sent  out  to 
drive  them  away.  The  story  of  the  conflict  which  followed, 
lasting  ten  years  (1753-1763),  resulting  in  the  campaign  against 
Quebec  and  the  death  of  Wolf  on  the  Heights  of  Abraham,  is 
familiar  history.  By  the  treaty  of  peace  which  followed  the 
French  relinquished  all  claims  in  North  America  except  the 
Territory  of  Louisiana.* 

Colbert  applied  himself  diligently  to  building  up  manufact- 
ures at  home  and  commerce  abroad.  He  encouraged  traJe  with 
the  French  colonies  in  Canada  and  the  West  Indies,t  as  well  as 
with  the  Mediterranean  coast  and  Africa.  Under  his  influence 
heavy  duties  were  imposed  on  imports  in  order  to  stimulate 


♦By  the  treaty  of  Utrecht  in  1713  the  French  had  ceded  to  England, 
New  Foundland,  Nova  Scotia,  New  Brunswiclc  and  the  Hudson  Bay  Territory. 

f  Prance  acquired  Guiana  in  1626,  colonized  Guadeloupe  in  1634  and  Mar- 
tinique in  1635.  Acquired  a  portion  of  Hayti  in  1697,  which  it  held  until 
1797. 


70  HISTORY    OF    COMMERCE. 

home  productions,  and  bounties  and  subsidies  were  given  to  en- 
courage exports.     Commercial  treaties  were  formed  and  trading 

companies  organized  to  develop  new  fields  of  pro- 
Home*'°"^^*        duction  and  commerce,  such  as  the  Territory  of 

Louisiana.  The  imports  at  the  time  were 
chiefly  raw  silk,  wool,  flax,  cattle  and  colonial  products,  coffee, 
sugar,  tobacco  and  spices.  The  exports  were  mostly  wine,  fine 
silk  goods,  and  woolen  cloth.  But  notwithstanding  the  efforts  of 
Colbert  and  the  great  ability  which  he  displayed  in  fostering  the 
commercial  interests  of  France  during  the  reign  of  Louis  XIV, 
the  prosperity  of  the  kingdom  did  not  rest  upon  a  stable  and 
permanent  foundation.  The  wars  which  were  waged  by  the  king 
for  the  purpose  of  enlarging  his  realm  and  glorifying  his  reign 
made  France  under  Louis  XIV  the  foremost  power  in  Europe, 
but  drained  the  country  of  money  and  men.  The  oppressive  tax- 
ation necessary  in  order  to  carry  on  these  wars,  maintain  an  ex- 
travagant court  and  withal  construct  the  grand  palace  and 
gardens  at  Versailles,  which  outshone  all  the  kingly  palaces  of 
Europe,  together  with  the  religious  dissensions  and  persecutions 
which  stirred  up  the  country,  made  commercial  and  industrial 
progress  and  prosperity  difficult  and  uncertain.  Had  it  not  been 
for  the  natural  productiveness  of  the  fields  and  vineyards  of 
France,  and  the  rich  territory  of  Alsace,  Burgundy  and  Flanders 
wrung  from  Germany  as  trophies  of  the  Thirty-years  war,  it  is 
difficult  to  conceive  how  the  people  could  have  carried  their 
burden. 

One  of  the  most  serious  blows  to  the  prosperity  of  the  peo- 
ple, as  well  as  the  greatest  blot  of  shame  upon  the  reign  of 
Louis  XIV,  was  his  persecution  of  the  Huguenots.  He  believed 
Revocation  ^^^^  ^^^  Unity  of  the  church  was  inseparable  from 

of  the  Edict  a  perfect  monarchy,  and  hence  began  a  series  of 

of  Nantes  oppressive  proceedings  against  all  dissenters  from 

the   established   religion.      Colbert,   who   esteemed  the   Hugue- 
nots as  active,  industrious  and  thrifty  citizens,  prevented  for  a 


FRANCE.  71 

time  these  violent  measures,  but  his  influence  was  not  sufficient 
to  stay  the  hand  of  illtempered  religious  zeal.  The  Huguenots 
were  excluded  from  office  and  denied  many  civil  and  political 
rights.  The  number  of  their  churches  was  limited,  and  these 
were  confined  to  a  few  of  the  principal  towns;  children  were 
torn  from  their  parents  and  brought  up  as  Catholics,  and  finally 
companies  of  cavalry  were  sent  among  these  quiet  people  to 
coerce  and  intimidate  them.  At' last  (1685)  came  the  Revocation 
of  the  Edict  of  Nantes,  taking  away  all  rights  from  them.  Their 
religious  worship  was  forbidden,  their  churches  were  destroyed, 
their  preachers  banished  and  their  schools  closed.  When  the 
emigration  from  the  realm  became  so  serious  as  to  be  really 
alarming,  it  was  strictly  forbidden,  and  the  shores  and  bound- 
aries of  France  were  closely  guarded.  But  despite  threats  and 
guards,  more  than  half  a  million  industrious,  law-abiding  and 
wealth-producing  citizens  left  France,  carrying  with  them  their 
industry  and  their  faith.  Many  of  them  went  to  England,  and 
others  to  Holland,  carrying  their  silk  manufacturing  and  stock- 
ing weaving  with  them.  Still  others  settled  in  Switzerland  and 
Germany,  while  a  few  found  their  way  to  America  and  settled  in 
North  Carolina.* 


*The  Edict  of  Nantes  was  a  decree  of  toleration  issued  by  Henry  IV  in 
1598  guaraoteeing  freedom  of  worsliip  aud  equality  of  riglits  to  Protestants. 


CHAPTEE  YIII. 
COMMERCE  OF  FRANCE— Continued. 

COLBERT;    JOHN    LAW;    THE    FRENCH    REVOLUTION;    NAPOLEON'S 
POLICY;    RECENT  FRENCH  COMMERCE. 

Louis  XIV  lived  to  see  his  kingdom  torn  and  distracted,  his 
conquests  lost,  a  large  portion  of  his  colonies  in  the  possession 
of  his  enemies,  and  a  smouldering  hatred  for  each  other  arise 
among  his  subjects.  Monopolies  were  multiplied  in  order  to 
meet  the  needs  of  the  nobles,  of  whom  there  were  one  hundred 
and  forty  thousand  in  France  at  that  time.  Together  with  the 
clergy,  they  owned  the  best  mines  and  farm  lands;  all  of  the 
large  and  handsome  buildings,  the  palaces  and  castles  and  even 
the  best  of  the  movable  property.  They  escaped  taxation,  dis- 
dained labor  and  eagerly  seized  and  consumed  the  hard-earned 
products  of  the  poor  laborers.  Under  the  wanton  luxury  of 
his  successor,  Louis  XV,  silk  weaving  revived  some- 
Loyfs^xv  what,  and  agriculture  improved,  but  the  country 

was  practically  bankrupt.  Farmers  were  nearly 
everywhere  poor  renters  of  their  small  holdings,  weighed  down 
by  tithes  and  heavy  taxes,  while  the  lords  lived  in  their  castles  or 
in  the  principal  towns  or  Paris,  squandering  the  income  wrung 
from  their  miserable  tenants. 

About  this  time  there  appeared  in  France  one  John  Law, 
a  Scotchman,  who  ojffered  a  solution  of  all  the  country's  diffi- 
culties. He  proposed  to  liquidate  the  vast  indebtedness  with 
which  the  ambitious  schemes  of  Louis  XIV  had  burdened 
France.  This  was  so  enormous  that  the  whole  annual  revenue 
scarcely  sufficed  to  pay  the  interest.  He  founded  a  Land  Bank 
(1716)  and  organized  the  Mississippi  Company.  In  consider- 
ation of  his  liquidating  the  public  debt,  his  bank  was  made  a 

73 


MISSISSIPPI    BUBBLE.  73 

state  institution  and  authorized  to  issue  a  paper  currency.  He 
then  issued  inconvertible  notes  to  the  amount  of  the  value  of 
John  Law  the  land  of  the  kingdom  based  upon  the  land  itself 

Mtssls^r^l^"**  as  a  supposed  security.  France  was  flooded  with 
Company  this  inflated  currency.     Prices  of  all  commodities 

rose,  the  rate  of  interest  advanced,  and  stock  in  the  bank 
was  in  great  demand.  Law  was  able  to  declare  a  bank  dividend 
of  forty  per  cent,  payable  in  paper  money.  Seeing  that  Law  was 
such  a  remarkable  financier  and  his  bank  so  prosperous,  the  peo- 
ple were  eager  to  participate  in  his  Mississippi  scheme.  The  desire 
to  purchase  shares  in  this  scheme  now  amounted  to  a  frenzy. 
Enormous  profits  were  expected  to  be  realized  by  the  Mississippi 
Company  from  its  supposed  gold  mines  yet  undiscovered,  and 
from  planting  and  commerce.  The  new  company  grew  and 
expanded,  absorbed  the  East  India  Company,  increased  its  capital 
stock  to  six  hundred  and  twenty-four  thousand  shares  of  five 
hundred  and  fifty  francs  each,  and  offered  to  lend  the  govern- 
ment a  billion  six  hundred  million  francs  at  three  per  cent. 
Paris  was  wild  with  excitement.  The  shares  in  the  Mississippi 
Company  rose  in  the  market  to  forty  times  their  par  value. 
Everybody  seemed  to  grow  rich.  Law  worked  his  two  schemes, 
the  bank  and  the  Mississippi  Company,  side  by  side,  and  one 
helped  the  other.  Through  the  bank  he  inflated  the  currency, 
making  it  possible  to  float  the  Mississippi  scheme,  and  as  fast 
as  the  stock  of  the  Company  was  sold,  the  money  flowed  back 
into  the  bank,  enabling  it  to  be  used  in  making  bank  dividends. 
Government  bonds,  which  a  short  time  before  had  been  selling 
at  twenty  cents  on  the  dollar,  so  low  was  the  credit  of  the  king- 
dom, were  redeemed  by  Law  at  par,  and  investors  became  eager 
to  buy  government  securities.  Land  was  bought  and  sold  at 
fabulous  prices.  New  issues  of  paper  currency  continued  to  be 
made  until  the  total  reached  almost  to  the  enormous  sum  of 
two  thousand  million  francs.  All  the  while  the  specie  was  quietly 
going  out  of  France,  and  there  was  nothing  but  credit  left  as  a 


U  HISTORY    OF    COMMERCE. 

basis  for  the  money  circulation.  Finally,  after  four  years  of 
financial  rioting  in  the  wildest  schemes  and  theories,  credit 
became  strained  to  the  breaking  point.  The  bubble  burst  and  a 
panic  ensued.  Law  became  a  fugitive.  Kuin  and  despair  spread 
through  the  kingdom,  and  an  insurrection  of  the  common  people 
was  imminent,  but  with  great  difficulty  was  prevented.  The 
terrible  day  of  reckoning  had  not  yet  come.  It  is  a  strange  co- 
incidence that  while  the  Mississippi  scheme  was  in  operation  in 
France  a  similar  gambling  mania,  in  the  form  of  the  South  Sea 
Bubble,  held  possession  of  England,  and  another  of  the  same 
kind  infatuated  Holland.  They  all  three  collapsed  about  the 
same  time  and  with  the  same  effects. 

After  the  failure  of  John  Law's  scheme,  the  commerce 
of  the  country  was  depressed  and  manufactures  did  not  improve. 
In  1756  began  the  Seven-years  war  (1756-1763)  with 
England,     by     which     France     lost     all     of     her     American 

colonies  except  Louisiana.  The  commercial  su- 
Reaction*"  premacy  of  Europe,  and  of  the  world,  then  passed 

over  to  England.  The  treasury  of  France  was 
empty,  the  country  in  debt,  credit  gone,  and  the  people  borne 
down  with  financial  burdens.  The  new  king  (Louis  XVI)  was 
weak  and  injudicious,  and  the  queen  frivolous  and  extravagant. 
The  war  for  American  independence  had  been  brought  to  a 
successful  issue,  and  had  aroused  the  spirit  of  popular  liberty 
in  France.  Under  these  conditions  the  common  people  in  1789 
rose  in  revenge  for  the  wrongs  they  had  suffered  for  centuries, 
and  inaugurated  the  great  French  Revolution. 

Peaceful  commerce  could  not  exist  during  a  reign  of  anarchy. 
Terror  made  property  insecure,  and  the  wealthy  fled  from  the 

country,  carrying  their  portable  wealth  with  them. 
Resolution  ^^  scarcc  had  coin  become  in  the  first  year  of  the 

Revolution,  that  large  issues  of  paper  were  re- 
sorted to,  and  it  was  made  a  capital  offense  to  refuse  to  receive 
this  at  par;  but  foreigners  were  not  bound  by  the  statute,  and 


UNDER    NAPOLEON.  75 

took  from  the  country  all  of  the  gold  and  silver  that  was  not 
hoarded.  The  paper  currency  sank  lower  and  lower  in  purchas- 
ing power,  until  a  pound  of  butter  could  not  be  had  for  less  than 
700  or  800  francs,  and  a  pair  of  boots  cost  as  high  as  10,000 
francs.  Internal  trade  and  manufactures  were  prostrated  and 
foreign  commerce  annihilated. 

At  this  juncture  Napoleon  appeared  upon  the  scene  of  action, 
and  in  1806  issued  what  has  been  called  his  Berlin  Decree,  by 
which  he  hoped  to  destroy  British  commerce  by  sealing  the  ports 
of  the  entire  continent  against  English  vessels.  England  retali- 
ated by  capturing  French  ships  and  colonies,  and  thus  for  several 
years  the  ports  of  Europe  dared  not  admit  English  vessels  for 
fear  of  the  wrath  of  Napoleon  nor  permit  their  own  vessels  to 

leave  their  moorings  for  fear  of  British  cruisers. 
Poiicy*°°**  ^^^  commerce  of  Europe  as  well  as  England  was 

thus  seriously  injured,  while  the  decree  caused 
manufactures  and  home  industries  in  France  to  revive,  in  an 
effort  to  meet  the  demand  for  goods  which  could  not  be  im- 
ported. Napoleon  laid  down  the  principle  that  France  should 
be  self-sustaining  in  the  production  of  all  that  was  necessary 
for  her  maintenance.  He  increased  the  duties  on  imported 
goods,  rigorously  protected  trade  marks,  and  re-estab.lished 
several  of  the  old  trade  corporations.  To  supply  the  loss  of 
colonial  produce,  no  longer  obtainable  from  the  English  colonies, 
tobacco  and  corn  were  cultivated,  and  for  the  purpose  of  making 
sugar  to  take  the  place  of  cane-sugar,  no  longer  obtainable  from 
San  Domingo  on  account  of  the  negro  revolution,  beet-sugar  was 
invented  and  the  beet  extensively  cultivated.  Cotton,  linen  and 
woolen  goods  were  extensively  produced  and  manufacturers  were 
busy,  but  not  having  to  compete  with  foreign  imports  clothing 
was  neither  good,  cheap,  nor  abundant.  Eoasted  beans  were 
substituted  for  coffee,  soda  for  potash,  and  bleaching,  dyeing, 
tanning,  distilling  and  other  arts  depending  upon  chemistry 
were  greatly  promoted  by  means  of  ingenious  substitutes. 


76  HISTORY    OF    COMMERCE. 

"To  Napoleon  is  due  the  creation  of  Chambers  of  Commerce 
and  Manufactures,  of  the  Conseils  de  Prudhommes  or  mixed 
juries  of  the  most  skillful  operators  and  masters  for  settling 
industrial  disputes,  workmen's  certificates,  and  the  institution  of  a 
property  in  trade  marks.  He  constructed  and  repaired  ten  thou- 
sand miles  of  roads,  crossing  in  some  instances  mountains  by 
highways  worthy  of  the  Eomans,  built  bridges  and  canals,  and 
beautified  Paris/* 

One  of  the  beneficial  effects  of  the  Revolution  was  the  change 
in  the  tenure  of  land  in  France.  Prior  to  that  event  enormous 
estates  were  held  by  the  nobility  and  aristocracy,  which  had 
descended  from  generation  to  generation  without  division.  It 
was  ordained  that  thereafter  estates  should  be  equally  shared  by 
all  the  children  of  a  proprietor  dying  intestate.  This  soon  result- 
ed in  dividing  the  soil  into  numerous  small  allotments,  as  it  is 
to-day,  resulting  in  better  cultivation  of  the  land  and  a  more 
thrifty  and  better  contented  peasant  class. 

After  the  battle  of  Waterloo  and  the  final  abdication  of 
Napoleon,  it  was  hoped  that  France  would  see  a  return  of  peace 
and  a  revival  of  commerce,  but  for  several  years  in  succession 
her  harvests  were  poor,  taxes  to  defray  the  expenses  of  the 
previous  wars  continued  heavy,  and  the  country  seemed  politi- 
cally and  commercially  exhausted.  Its  foreign  trade  had  been 
so  long  lost  that  it  had  to  be  built  up  anew,  and  this  proved  a 
slow  process,  for  other  nations  had  secured  possession  of  the 
markets.  Meanwhile  machinery  had  greatly  improved  in  En- 
gland, and  its  exportation  being  strictly  prohibited  by  Parlia- 
Pj.q^  ment,  England  was  able  to  undersell  France.    But 

Waterloo  to  the  French  bent  their  energies  with  vigor  to  the 

apoeon  II  ^^^^  ^^  building  up  their  industries,  and  soon 
so  distinguished  their  wares  by  the  excellence  of  their  quality, 
that  in  ten  years  they  were  abreast  of  their  rival,  England, 
in  many  lines  of  manufacture  and  in  bleaching  and  dyeing  they 
far  surpassed  her.    In  1825  the  prohibition  against  the  exporta- 


FRANCE.  77 

tion  of  British  machinery  was  repealed,  and  this  left  the  French 
free  to  profit  by  English  inventions.  A  general  desire  for  in- 
dustrial improvement  seemed  to  pervade  France,  and  capital 
returned  to  the  channels  of  industry  and  commerce.  Silk  and 
cotton  weaving,  paper  making,  carpet  weaving,  tanning  and  kin- 
dred arts,  all  became  prosperous.  Agriculture,  however,  failed 
to  show  a  corresponding  degree  of  improvement,  owing,  no 
doubt,  to  adverse  or  indifferent  legislation.  Although  53  per 
cent,  of  the  French  people  depended  upon  the  cultivation  of  the 
soil  for  their  subsistence,  wooden  plowshares,  harrows  with 
wooden  teeth,  and  in  the  southern  provinces,  the  Oriental  mode 
of  oxen  treading  out  the  grain,  still  remained  in  use  up  to  the 
time  of  Napoleon  III. 

The  policy  of  Napoleon  III  was  favorable  to  agriculture  and 
commerce.  He  encouraged  the  rearing  of  fine  draft  horses  and 
the  introduction  of  improved  implements  and  methods  of  agricul- 
ture, thus  raising  the  tillage  of  the  soil  to  a  place  befitting  the 
dignity  of  his  empire.  Unlike  his  predecessors,  he  did  not 
Commerce  regard  the  use  of  foreign  products  by  his  people  as 

Napo'ieoniii  prejudicial  to  home  indu^ries,  but  rather  as  a 
1848.1870  stimulus  to  better  skill  on  the  part  of  the  me- 

chanics and  artisans  of  France.  Accordingly  he  reduced  the 
duties  on  foreign  goods  and  especially  on  foreign  machinery,  with 
a  view  to  encouraging  its  importation  from  England  and  the  in- 
troduction of  improved  processes  of  English  manufacture.  The 
rapid  extension  of  the  use  of  machinery  in  France  under  Na- 
poleon III,  the  introduction  of  steam  power  and  the  invention 
of  the  Jacquard  loom*  for  weaving  all  kinds  of  figured  goods, 
gave  a  great  impetus  to  the  industries  of  the  country.  In  ten 
years,  1858-1868  the  exports  of  France  increased  from  1,750,- 
000,000  francs  to  3,000,0000,000  francs,  the  effect  largely  of  the 


♦Jaquard  was  mistreated,  his  looms  destroyed  and  he  finally  exiled  for 
his  invention,  but  he  lived  to  be  regarded  as  the  father  of  modern  French 
industry.— Yeats  Vicissitudes  of  Commerce. 


78  HISTORY    OF    COMMERCE. 

so-called  Cobden  treaty  with  England  made  in  1860,  which 
greatly  reduced  the  duties  on  foreign  imports. 

In  1867  a  grand  Universal  Exposition  was  held  in  Paris 
by  which  France  showed  to  the  world  what  excellent  progress 
she  had  made  in  the  arts  of  peace.  The  intelligence,  ingenuity 
and  enterprise  of  her  inhabitants  were  here  wonderfully  dis- 
played, and  it  was  apparent  that  in  the  production  of  fine  silk 
and  woolen  goods,  wines  and  brandies,  furniture,  glass,  clocks 
The  Universal  ^^^  artistic  wares,  as  well  as  in  art  and  matters  oi 
Exposition  of  tastc  and  education,  France  stood  second  to  no 
^^^  nation,  if  indeed  she  did  not  surpass  all  others. 

Three  years  after  the  Exposition  (1870)  the  Franco-Prussian 
war  broke  upon  the  country,  resulting  in  the  defeat  of  her 
armies,  the  capture  of  the  Emperor,  Napoleon  III,  the  loss  of 
her  valuable  provinces  of  Alsace  and  Lorraine,  and  the  payment 
to  Germany  of  an  indemnity  of  5,000,000,000  francs. 

Notwithstanding  these  disasters,  the  trade  and  industries  of 
France  quickly  revived  and  resumed  their  former  prosperity. 
The  wonderful  natural  productivity  of  France  again  mabifested 
itself,  and  the  war  indemnity,  enormous  as  it  was,  was  quickly 
paid.  There  were  in  1872  more  than  200,000  hand  looms 
besides  80,000  power  looms  at  work  in  France,  giving  rise  to  a 
secondary  but  very  important  industry  in  the  con- 
Recent  French  structiou  of  their  machinery.  Lyons  and  the 
south  of  France  produced  large  quantities  of  silk 
goods,  and  woolens  were  woven  extensively  in  the  north,  while 
Eheims  and  Amiens  turned  out  Cashmere  shawls  and  other 
textures  of  long-fibered  wool,  exceeding  in  beauty  the  famous 
fabrics  of  India.  Eouen  on  the  Seine  became  the  seat  of  the 
cotton  industry,  and  received  the  title  of  the  "Manchester  of 
France,'^  while  Havre  at  the  mouth  of  the  same  river  corre- 
sponded to  Liverpool  as  the  depot  for  the  importation  of  raw 
material  and  the  place  of  export  for  the  manufactured  article. 
Agriculture,  stock  raising  and  wine  growing  flourished,  and  glass, 


FRANCE.  79 

porcelain,  and  fancy  articles  of  jewelry  and  furniture  were  pro- 
duced in  considerable  quantities  and  found  a  ready  market.  The 
Bank  of  France,  established  in  1803,  became  the  great  central 
financial  agent  of  the  country  second  only  in  consequence  to  the 
Bank  of  England,  while  the  Paris  Bourse  took  rank  as  one  of  the 
great  Stock  Exchanges  of  the  world. 

Although  one  of  the  Great  Powers  of  Europe,  France  has 
never,  since  the  sale  of  Louisiana,  possessed  extensive  colonies. 
Her  West  Indian  possessions  and  the  settlements  in  Asia  were 
too  small  to  affect  either  her  commerce  or  revenue.  Algiers  was 
acquired  in  1830,  but  never  proved  remunerative 
coionii  Trade  ^^  France.  Several  small  holdings  on  the  west 
coast  of  Africa  yield  valuable  products  in  ivory, 
gold,  oil  and  cotton,  and  recently  France  has  acquired  a  footing 
in  Indo-China  from  which  she  derives  silk  and  rice.  Colbert's 
East  India  Company  planted  four  small  settlements  in  Madagas- 
car, and  that  island  may  prove  a  profitable  holding  in  the  future. 
During  the  past  quarter  of  a  century,  as  compared  with 
Germany  and  England,  France  has  been  losing  ground  as  one 
of  the  great  nations,  and  has  failed  to  make  the  progress  which 
her  natural  advantages  of  soil  and  climate  should  enable  her 
to  make.  The  upper  classes  are  excessively  fond  of  dress,  pleas- 
ure and  military  glory,  and,  as  a  result,  the  energies  of  the 
nation  have  not  been  well  directed.  The  national  debt  is  the 
greatest,  per  capita,  of  any  nation,  being  seventeen  and  one-half 
times  as  great  as  that  of  Germany,  six  times  that  of  the  United 
States  and  one  and  one-half  times  that  of  Great  Britain.  The 
bulwark  of  France  is  in  the  stability  of  her  peasantry.  These 
Present  surpass  in  industry,  thrift  and  frugality  all  other 

Condition  of  pcoplcs  of  Europc,  and  if  France  were  well  gov- 
erned, its  prosperity  would  equal  if  not  surpass 
its  neighboring  nations.  Rural  France  is  divided  up  into  3,500,- 
000  small  farms,  a  large  majority  of  which  are  cultivated  by  the 
owners,  thus  giving  a  self  interest  and  stability  to  the  population 


80  HISTORY    OF    COMMERCE. 

and  to  agriculture  of  the  greatest  value  to  the  nation.  Having 
ready  markets  near  at  hand  in  Paris  and  other  large  cities,  a 
considerable  portion  of  these  farms  are  devoted  to  raising  small 
but  profitable  crops,  such  as  potatoes,  fruit,  poultry  and  the 
like.  In  1882  the  vineyards  of  France  were  ravaged  by  an  insect, 
entailing  a  total  or  partial  loss  of  over  4,000,000  acres,  valued  at 
$1,000,000,000.  The  pests  were  finally  exterminated,  but  the 
wine  industry  was  prostrated,  and  since  that  time  a  large  portioA 
of  the  wine  used  in  domestic  consumption  has  been  annually 
imported. 

In  1900  the  French  gave  another  great  Exposition  in  Paris, 
to  exhibit  at  the  close  of  the  century  the  progress  of  the  world 
in  the  arts  and  sciences.  Within  the  palaces  of  that  exposition 
were  gathered  the  best  products  of  the  hand  and  brain  of  man 
from  all  parts  of  the  world.  It  was  apparent  that  France  was 
abreast  of  the  great  nations  in  processes  of  manufacture,  and 
that  in  articles  of  luxury,  such  as  silk,  glass,  porcelain,  jewelry, 
furniture  and  brandy,  she  surpassed  all  other  nations  in  the 
artistic  character  of  her  wares. 


CHAPTER  IX. 
COMMERCE  OF  ENGLAND. 

BEFORE  THE  NORMAN  CONQUEST;   ENGLISH  WOOL;   ELIZABETH'S 
POLICY;   CARRYING  TRADE. 

While  the  Mediterranean  was  dotted  with  the  commerce  of 
the  Phoenicians  and  Carthaginians,  the  British  Isles  were  in  a 
semi-barbarous  state,  the  inhabitants  living  in  huts  and  possess- 
Ancient  ^°S  ^^®  rudcst   implements   to   supply   the   bare 

English  necessaries  of  life.     The  ancient  commercial  his- 

Commerce  ^^^^  ^£  thesc  islands  gave  no  indication  of  the 

greatness  which  the  empire  of  Britain  was  destined  to  achieve 
in  the  domain  of  commerce  and  manufacture  in  modern  times. 
Separated  from  the  mainland  of  Europe  and  the  highways  of 
Mediterranean  civilization,  the  Britons  remained  passive,  and 
waited  at  home  for  traders,  chiefly  the  Phoenicians  and  Cartha- 
ginians, who  visited  their  coasts,  supplying  them  with  trinkets  in 
exchange  for  tin  and  lead  ore  found  in  abundance  lying  near  the 
surface.  Little  progress  was  made  in  the  scale  of  civilization 
until  after  the  Roman  conquest.  The  wealth  of  coal  and  iron 
stored  up  in  these  islands  was  unknown.  Herds  of  wild  cattle 
and  other  animals  roamed  through  the  dense  forests  which  at 
that  time  covered  most  of  the  area.  Little  attention  was  paid  to 
agriculture  and  the  natives  lived  chiefly  upon  fruits  and  the 
products  of  hunting.  The  invasion  of  the  Romans  infused  new 
life  and  intelligence  into  the  people,  and  gave  an  impetus  to 
their  civilization.  Thereafter  hides,  wool  and  furs  are  named 
as  among  their  exports.  English  wool  came  to  be  so  esteemed 
that  merchants  dealing  in  it  were  exempted  from  the  peril  of 
capture  in  war.  Eventually  wheat  and  cheese  began  to  be 
regular  articles  of  export. 

81 


83  HISTORY    OF    COMMERCE. 

Under  Eoman  rule  (B.  C.  54-A.  D.  455)  the  Britons  partook 
to  some  extent  of  the  refinement  of  their  masters,  and  reached 
a  higher  state  of  commercial  development  than  they  again  at- 
tained for  several  centuries.  These  enterprising  rulers  built 
roads,  cleared  forests,  drained  marshes,  opened  mines,  improved 
agriculture,  founded  towns,  and  introduced  a  thor- 

Britain  under  -u  j       •  l  £  j_        i  •   i 

Roman  Rule  ough  and  vigorous  sjstcm  01  government  which 
was  of  the  greatest  benefit  to  the  people.  Under , 
the  reign  of  the  Eoman  emperor  Augustus,  we  find  that  a  con- 
siderable commerce  had  grown  up,  and  Britain  exported  gold, 
silver,  lead,  tin  and  iron,  besides  considerable  quantities  of  wheat, 
cattle,  skins  and  wool.  The  imports  were  chiefly  articles  of 
luxury  such  as  ivory,  gold  ornaments,  amber  and  articles  in 
glass. 

After  the  decline  of  the  Roman  Empire  and  the  withdrawal 
from  Britain  of  its  energizing  and  protecting  power,  came  in- 
vaders from  the  mainland  of  Europe,  the  Saxons,  Normans  and 
Saxons  Danes,  who  plundered  the  people,  disturbed  their 

Normans  institutions  and  ruined  their  commerce.     Pirates 

ravaged  the  coast,  and  trade  was  checked  by 
rapine  and  lawlessness,  so  that  few  foreign  merchants  would 
risk  life  and  property  for  the  profits  of  commercial  intercourse 
with  Britain.  Now  and  then  an  enlightened  king  would  en- 
deavor to  cultivate  and  revive  commerce  and  the  arts  of  peace, 
but  the  history  of  English  commerce  is  almost  a  blank  until 
the  time  of  King  Alfred  the  Great  (A.  D.  870).  He  founded  a 
navy  of  war  galleys,  each  rowed  by  sixty  or  eighty  men,  in  order 
to  protect  his  merchant  ships  from  the  depredations  of  pirates, 
encouraged  trade  by  cultivating  friendly  relations  with  foreign 
countries,  and  sent  embassies  even  as  far  as  India  on  missions 
of  commerce. 

During  the  Middle  Ages,  the  Baltic  and  North  Seas  were  in- 
fested with  pirates,  chiefly  Northmen,  who  regarded  the  mer- 
chant ships  of  neighboring  states  as  their  natural  plunder,    This 


ENGLAND.  83 

open  highway  robbery  on  the  seas  was  for  centuries  the  common 
employment  of  the  younger  sons  of  the  royal  and  noble  families 

of  Denmark,  Norway  and  Sweden,  and  was  con- 
Piracies  sidcrcd  a  legitimate  field  in  which  they  could  win 

fame  and  fortune.  During  the  eighth  and  ninth 
centuries  the  coasts  of  England,  Scotland  and  France  suffered 
severely  from  the  ravages  of  these  pirates,  and  as  previously 
stated,  one  of  the  incentives  to  the  formation  of  the  Hanseatic 
League  was  the  mutual  protection  of  the  towns  against  piracy. 
Furthermore,  at  that  distant  and  unenlightened  period,  human 
jealousies  and  rivalries  were  stronger  in  many  instances  than 
the  instincts  of  right  and  justice,  and  trading  towns  often  re- 
garded the  seas  as  the  domain  of  the  strongest  and  committed 
acts  against  rivals  which  would  now  be  regarded  as  piracy. 
Individuals  undertook  to  enforce,  on  their  own  account,  repara- 
tion for  maritime  wrongs,  and  were  not  particular  when  the 
real  offender  could  not  be  reached  in  substituting  another. 

An  important  feature  of  the  internal  commerce  of  England, 
and  other  parts  of  Europe  as  well,  during  the  Middle  Ages, 
was  the  annual  fairs  which  were  held  in  the  principal  towns. 
These  fairs  were  the  means  of  bringing  buyer  and  seller  together, 
and  a  general  interchange  of  commodities  resulted.     Owing  to 

the  limited  facilities  for  travel  and  transportation 
Middle  Ages         ^^  goods,  the  lack  of  roads  and  vehicles,  and  the 

fact  that  the  people  traveled  but  little,  it  was  a 
great  convenience  to  have  a  common  meeting  time  and  place, 
where  articles  of  manufacture  from  distant  parts  of  the  country 
or  world  could  be  exchanged,  and  the  wants  of  the  people  thus 
supplied.  The  location  of  these  fairs  was  usually  determined 
by  the  question  of  convenience,  the  size  and  importance  of  the 
town,  or  the  fact  that  a  certain  point  was  a  shrine  whence  came 
pilgrims  periodically  to  worship.  Thus  Mecca  continues  to 
hold  a  fair,  where  large  quantities  of  goods  are  sold  annually. 
The  principal  English  fairs  in  the  Middle  Ages  were:  That  of 


84  HISTORY    OF    COMMERCE. 

London,  known  as  St.  Bartholomew's  Fair,  where  wool  and  cloth 
were  the  chief  articles  sold.  This  fair  was  not  entirely  abolished 
until  1840.  The  fair  at  Winchester,  where  large  quantities  of 
wool  were  sold;  and  the  great  fair  of  Stonebridge,  to  which 
came  merchants  from  all  parts  of  Europe.  This  fair  continued 
a  month,  and  being  near  the  coast  was  attended  by  "merchants 
of  Venice  and  Genoa,  with  stores  of  eastern  produce  and  their 
own  manufactures  of  silks,  velvets,  cotton  goods  and  glass.  The 
Flemish  brought  the  fine  linens  and  cloths  of  Bruges,  Liege, 
Ghent  and  other  manufacturing  towns.  French  and  Spanish 
merchants  came  with  their  wines  and  fruits;  the  great  traders 
of  the  Hansa  brought  furs  and  amber,  iron,  copper  and  other 
metals,  flax,  timber  and  grain,  and  all  the  products  of  the  north. 
In  the  same  way  the  English  farmers,  or  traders  acting  on  their 
behalf,  carried  to  this  fair,  hundreds  of  huge  sacks  of  wool  for 
the  manufacturing  towns  of  Europe,  barley  for  the  Flemish 
breweries,  with  corn,  horses,  cattle,  and  many  other  goods."* 

As  means  of  transportation  and  travel  improved  these  fairs 
gradually  declined,  and  in  the  age  of  railroads  and  steamships 
have  disappeared  almost  entirely  as  trading  centers.  The  local 
store  and  the  traveling  salesman  have  superseded  them.  The 
principal  fair  in  existence  at  the  present  time  is  that  at  Nijni- 
Novgorod  in  eastern  Russia,  which  owes  its  existence  to  the  prim- 
itive condition  of  that  part  of  the  country,  and  the  lack  of  trans- 
portation.t 

The  Norman  Conquest  brought  a  change  in  dynasties  in 
England,  and  with  it  contentions  which  retarded  the  progress  of 
commerce.     The  Feudal  system  fettered  vassals,  while  nobles 


♦Gibbins'  History  of  Commerce. 

fThis  fair  lasts  six  weelis  and  is  visited  by  300,000  people  from  central 
Asia  and  Europe.  A  town  of  stone  consisting  of  5,000  shops  or  bazars  laid 
out  in  streets  has  been  erected  for  this  fair.  Special  goods  are  sold  in  cer- 
tain quarters  of  the  town,  thus  in  the  Persian  quarter  carpets,  rugs,  shawls 
and  silks  are  sold;  in  another  tea;  another,  skins  and  furs,  and  in  another 
metallic  wares.  The  sales  foot  up  annually  about  twenty  million  pounds 
sterling. 


NORMAN    CONQUEST.  85 

spent  their  time  in  war  and  the  chase.  "Red  deer  and  wild 
swine  were  of  higher  value  in  the  eyes  of  such  men  than  the  lives 
of  Saxon  Serfs."  Henry  I,  in  1110,  endeavored  to  encourage 
Norman  homc  manufacture  by   establishing  a  colony  of 

Conquest.  1066  Flemish  weavers  in  London,  and  gave  them  many 
Great  Charter  privileges,  but  displayed  his  characteristic  igno- 
rance by  condemning  all  foreign  wool  to  be  burnt.  Then  came 
the  crusades,  in  which  the  zealous  Richard  I  took  a  prominent 
part,  with  the  result  that  Eastern  commodities  now  came  more 
freely  into  western  Europe.  Gold,  spices  and  frankincense  from 
Arabia;  precious  stones  from  Egypt;  purple  cloth  from  India; 
palm  oil  from  Bagdad  and  weapons  from  south  Russia  and  the 
Baltic  Sea  were  introduced  into  England,  and  trade  began  to 
show  evidences  of  steady  growth.  Then  came  the  Great  Charter, 
wrested  from  the  miserable  King  John,  in  which  were  clauses 
favorable  to  commerce,  guaranteeing  merchants  against  exces- 
sive taxation  and  establishing  a  uniform  system  of  weights  and 
measures  throughout  the  kingdom.  During  all  this  time  En- 
glish wool  was  the  chief  basis  of  wealth.  The  considerable 
amount  which  the  English  exported  shows  its  relative  value  to 
other  products,  and  at  the  same  time  indicates  the  insignificance 
of  their  manufactures.  Only  the  coarsest  cloths  were  made  at 
home.  Most  of  this  wool  went  to  the  looms  of  Flanders,  where  a 
superior  quality  of  fabrics  was  made  and  supplied  to  England 
English  Wool  ^^^  ^^^  P^^*^  °^  Europe.  Thus  England  as  a  source 
Banishment  of  supply  for  the  raw  product  and  Flanders  as  a 
of  Jews  great  manufacturing  country  were  interdependent 

commercially,  and  this  tended  to  make  them  so  politically,  so 
that  when  Edward  I,  in  1297,  wished  to  attack  France,  he  first 
made  sure  of  the  friendship  and  support  of  Flanders,  and  later 
sovereigns  pursued  the  same  policy.  Edward  I  recognized  the 
value  of  commerce  chiefly  as  a  means  of  revenue,  and  for  this 
reason  aimed  to  foster  it  by  opening  English  ports  to  the  mer- 
chants of  Germany,  France,  Portugal  and  Spain.    As  a  further 


86  HISTOKY    OF    COMMERCE. 

measure  for  enriching  his  exhausted  treasury  and  relieving 
himself  of  enormous  debts,  while  displaying  his  religious  intol- 
erance and  bigotry,  he  confiscated  the  property  of  sixteen  thou- 
sand five  hundred  industrious  Jews  whom  he  banished  from  his 
Kingdom.* 

Edward  III  offered  special  privileges  to  the  weavers  and 
dyers  of  Flanders  who  would  settle  in  his  realms,  yet  fettered 
the  grant  with  absurd  regulations  in  order  to  prevent  his  invited 
guests  from  becoming  too  rich.  During  his  reign  a  citizen  of 
London  is  said  to  have  been  executed  for  using  coal  as  fuel 
contrary  to  law.     The  opposition  to  coal  was  based  chiefly  on 

the  fact  that  at  that  time  chimneys  were  luxuries 
1326^^377  ^^^  commonly  enjoyed,  and  the  smoke  from  the 

fires  had  to  escape  by  the  cracks  and  crevices  of  the 
houses.  Glass  windows  were  about  as  rare  as  chimneys  at  that 
period. 

Up  to  the  fifteenth  century  England  had  depended  almost 
wholly  upon  foreign  ships  to  carry  away  her  exports  and  b^ing 
her  the  products  of  the  outside  world.  This  carrying  trade 
was  mostly  in  the  hands  of  the  merchants  of  the  Italian  cities 
(Genoa  and  Venice)  and  the  Hansa  towns,  whose  fleets,  consisting 
of  many  vessels,  laden  with  wool,  cotton,  silks,  velvets  and 
spices,  were  eagerly  looked  for  along  the  English  coast.  But  as 
the  English  learned  the  advantages  of  manufacturing  from 
Flanders,  so  they  learned  the  art  of  navigation  from  these  for- 
Deveiopment  ^^§^  merchantmen,  and  gradually  began  to  embark 
of  the  Carrying      in  the  busiucss  of  forcigu  commerce.     This  was 

vigorously  opposed  by  the  Hansa  towns,  who 
wished  to  have  no  participators  in  the  profits  of  a  lucrative  mo- 
noply,  and  conflicts  at  sea  were  frequent  and  exceedingly  har- 


*This  banishment  occurred  Nov.  1,  1290.  Edward's  excuse  for  the  decree 
was  that  the  Jews  were  clippers  of  the  coin  of  the  realm,  but  his  real 
reason  was  to  confiscate  their  property.  Their  banishment  was  a  severe 
blow  to  the  industrial  welfare  of  the  Kingdom.  Jews  were  not  permitted 
to  return  or  re-enter  England  again  until  the  time  of  Cromwell. 


CAKKYING    TRADE. 


87 


assing.  But  in  the  course  of  time  English  ships  became  more 
numerous  and  went  farther  abroad,  until  the  Hansa  found  that 
English  commerce  could  not  be  stifled,  and  the  visits  of  Italian 
ships  became  less  frequent  and  profitable,  until  they  finally- 
ceased  in  1587.  Thus  about  the  time  the  New  World  was 
discovered  England  was  expanding  in  its  commerce  and  manu- 
factures, and  preparing  to  take  its  place  along  with  Spain, 
Portugal  and  the  Netherlands,  as  one  of  the  leading  nations.  It 
was  far  behind  these,  however,  in  point  of  discoveries  in  the 
Western  Hemisphere,  but  was  destined  at  a  later  period  to  far 
surpass  them  in  colonial  possessions.  Under  Henry  VII  English 
commerce  was  placed  upon  a  firm  and  permanent  footing. 
Recognizing  the  necessity  for  a  naval  power  to  protect  his 
merchant  shipping,  he  built  a  fleet  of  war  ships,  called  the 
English  Com-  Great  Harry,  which  was  the  beginning  of  that 
ush^d  under"  ^^^J  which  defeated  the  Invincible  Armada  in 
Henry  VII  the  Tcigu  of  Quccu  Elizabeth,  and  has  given  En- 

gland its  supremacy  on  the  ocean  even  to  the  present  time.  As 
soon  as  England  was  able  to  protect  her  merchant  ships,  piracy 
declined,  her  flag  became  respected  and  her  commerce  increased. 
Henry  VII,  after  the  discovery  of  the  New  World,  empowered 
the  Cabots  to  undertake  voyages  of  discovery,  and  it  is  under  the 
right  of  discoveries  made  by  these  men  that  England  claims,  at 
the  present  time,  a  large  part  of  British  North  America. 

Henry  VIII  abolished  the  monasteries  and  set  up  the  Church 
of  England.  Up  to  that  time  the  church  owned  and  controlled 
about  one-fifth  of  all  the  valuable  land  in  the  realm,  and  upon 
the  dissolution  of  the  monasteries  these  lands  were  divided  and 
distributed,  thereby  greatly  improving  and  encour- 
M^as°e°ies*^*  ^o^^g  agriculturc,  and  this  in  turn  tended  to  im- 
prove manufactures.  Sheep  were  bred  in  large 
numbers  and  more  wool  was  produced.  As  the  natural  resources 
of  the  country  were  developed  and  utilized,  the  means  of  ex- 
change were  improved  and  commerce  extended.     Indian  spices, 


88  HISTORY    OF    COMMERCE. 

Turkish  carpets,  gums,  drugs  and  ivory  were  sought  in  the 
Mediterranean  and  Eastern  ports.  English  ships  went  on  voy- 
ages requiring  a  year  or  more  for  their  completion,  and  London, 
Southampton  and  Bristol  carried  on  trade  with  distant  parts  of 
the  world  in  English  ships. 

But  it  was  Elizabeth,  the  daughter  and  successor  of  Henry 
VIII,  who  promoted  British  commerce  most  effectually.  This 
remarkable  woman  was  ambitious  that  England  should  rival 
Spain  as  the  leading  power  of  the  world,  and  to  this  end  she 
legislated  often  arbitrarily,  and  frequently  for  the  moment  and 
not  for  time,  but  yet  with  the  single  purpose  always  in  view  of 
building  up  England's  power  and  resources.  During  her  reign 
agriculture  and  the  mechanic  arts  underwent  great  improve- 
ments, and  crops  were  at  times  so  abundant  that  wheat  was 
Qyggjj  exported.     Hemp  and  flax  were  successfully  cul- 

Elizabeth  tivatcd.    Manufactures  greatly  improved,  and  the 

1558-1603  weaving  of  woolen  cloth  received  a  fresh  impetus 

by  the  arrival  of  a  large  colony  of  weavers  from  the  Netherlands 
who  had  been  driven  out  by  the  religious  persecutions  of  Philip 
II  of  Spain.  When  the  Invincible  Armada  attacked  the  English 
navy  about  three  hundred  and  fifty  merchant  ships  were  pressed 
into  service  for  the  defense  of  England,  and  after  the  contest 
was  over  many  of  the  Spanish  prizes  served  to  swell  the  growing 
English  navy.  Ship-building  greatly  developed,  and  the  number, 
size  and  quality  of  the  vessels  built  underwent  a  remarkable 
change. 

Elizabeth  deprived  foreign  merchants  of  their  privileges, 
closed  the  London  agency  of  the  Hansa,  and  finally  went  to  the 
extreme  length  of  forbidding  foreign  vessels  to  enter  English 

harbors.  She  granted  numerous  monopolies  to 
PoUcy^*^^  encourage  home  enterprise,  and  thus  between  the 

restrictions  against  foreign  ships,  and  monopolies 
at  home,  the  people  were  debarred  the  enjoyment  of  many  useful 
commodities  made  abroad  and  compelled  to  pay  dearly  for  worse 


ELIZABETH'S    POLICY.  89 

articles  made  at  home.  Monopolies  became  so  oppres- 
sive, and  prices  of  iron,  lead,  coal,  saltpeter,  oil,  vinegar, 
starch,  yarn,  skins,  leather  and  glass  were  so  exorbitant,  that 
her  subjects  finally  protested  against  the  system  and  openly  de- 
nounced the  laws.  The  queen  wisely  yielded  to  the  popular 
demand,  thanked  the  House  of  Commons  for  calling  her  atten- 
tion to  the  wrong,  and  changed  her  policy. 

During  Elizabeth's  reign  trade  and  manufactures  prospered 
beyond  all  former  periods  in  English  history.  The  comforts  of 
life  were  multiplied  and  the  style  of  living  among  all  classes 
greatly  improved.  Prior  to  that  time  the  common  people  lived 
in  houses  with  dirt  floors,  no  pretense  being  made  to  sanitation, 
and  the  streets  were  so  filthy  that  London  and  many  other 
towns  were  annually  visited  during  the  summer  months  by  an 
epidemic  called  the  "Plague."  But  before  the  end  of  Elizabeth's 
reign  much  of  this  was  changed.  Houses  began  to  be  built  with  a 
view  to  health  and  comfort.  Tasteful  furniture  came  into  use, 
displacing  the  rude  arrangements  of  former  times. 
Prosperity  ^^^  Wealth  asserted  its  presence  among  the  com- 

mercial classes  as  well  as  among  royalty  and  nobili- 
ty. The  queen's  example  encouraged  a  taste  for  magnificence  in 
apparel.  Luxury  at  table  likewise  prevailed,  and  sumptuous 
habits  spread  from  London  to  every  province  of  the  realm.  The 
Royal  Exchange,  the  most  notable  commercial  emporium  in  En- 
gland, was  founded  at  this  time  and  opened  by  the  queen  in  per- 
son. The  famous  East  India  Company  was  chartered  by  Eliza- 
beth in  1600,  and  thus  was  laid  the  foundation  of  the  vast  En- 
glish empire  in  India  which  reached  its  fruition  in  the  reign  of 
Victoria.  This,  too,  was  the  Golden  Age  of  literature,  and  gave 
to  the  world  Shakespeare,  Bacon,  Spenser,  Ben  Jonson,  and  a 
host  of  others  who  have  enriched  the  world  with  productions  of 
inestimable  value. 

The  East  India  Company  chartered  by  Elizabeth  in  1600 
was  the  beginning  of  the  system  of  foreign  commerce  and  colo- 


90  HISTORY    OF    COMMERCE. 

nization  which  has  grown  to  such  immense  proportions,  and  made 
England  the  great  manufacturing  and  distributing  center  which 
she  is  to-day.    This  was  fashioned  after  the  Dutch 
Qomi&ay  ^^^^  India  Company  formed  about  the  same  time, 

and  was  given  the  exclusive  right  of  com- 
merce with  all  the  countries  extending  from  the  Cape  of  Good 
Hope  eastward  to  the  Straits  of  Magellan,  "except  such  coasts 
and  islands  as  might  already  be  occupied  by  some  friendly 
European  state."  The  government  of  the  company  was  vested 
in  a  governor  and  board  of  directors,  varying  in  number  at 
different  times  and  under  different  statutes.  Besides  these, 
local  councils,  having  limited  authority  over  particular  terri- 
tories, were  established  in  Madras,  Bombay  and  Calcutta.  The 
original  purpose  of  the  Company  was  the  profits  of  commerce, 
but  in  the  exercise  of  its  functions  it  gradually  assumed  a  gov- 
ernmental character.  It  began  as  a  purely  private  corporation 
of  trading  merchants,  free  from  governmental  direction,  but 
eventually  was  brought  under  a  "Board  of  Control"  appointed 
for  India,  and  subjected  to  home  supervision. 

This  company  met  with  wonderful  success  from  the  first, 
realizing  profits  from  its  voyages  and  the  sale  of  the  products 
of  India  of  fabulous  amounts.  The  Portuguese  and  Dutch,  who 
had  previously  become  thoroughly  established  in  the  trade, 
opposed  by  every  possible  means  the  encroach- 
company^***^  mcuts  of  the  English  merchants  upon  Indian  ter- 
ritory, but  by  winning  the  favor  of  the  Great 
Mogul  with  bribes  and  presents,  taking  advantage  of  the  quar- 
rels among  the  petty  chiefs  and  siding  with  the  one  most  likely 
to  be  successful,  the  company  in  time  gained  a  firm  footing 
and  established  agencies  and  trading  posts  in  various  vantage 
points  of  the  empire.  The  wealth  of  India  was  now  poured 
into  the  lap  of  Britain  by  ship  loads.  The  profits  of  the  com- 
pany became  enormous.  Shares  of  £100  rose  in  the  market  to 
£245,  £300  and  even  £500.     Luxurious  tastes  were  created  by 


EAST    INDIA    COMPANY.  91 

the  introduction  of  rare  commodities.  Spices  and  jewels  from 
India  were  extensively  used,  and  rare  cotton  and  linen  fabrics 
added  to  the  wearing  apparel  of  the  rich.  As  the  use  of  gun- 
powder in  war  increased,  there  arose  an  increased  demand  for 
nitre  which  Europe  could  not  satisfy,  but  the  supplies  from 
India  were  abundant  enough  to  meet  all  needs,  and  the  profits 
were  large. 

The  success  of  the  East  India  Company  and  the  enormous 
profits  which  it  was  realizing  from  its  royal  monopoly  excited 
the  jealousy  of  London  merchants,  with  the  result  that  a  rival 
company  was  formed  which  set  at  defiance  the  exclusive  privi- 
leges of  the  authorized  company,  and  fitted  out 
with VivaVs''*  ships  for  Indian  trade.  When  caught  these  were 
treated  without  mercy  as  pirates  by  the  East  India 
Company.  Nevertheless  they  continued  to  struggle  for  a  share 
of  Indian  commerce,  and  in  1698  disputed  in  Parliament  the 
renewal  of  the  charter  of  the  original  company.  The  result  was, 
a  combination  of  the  two  companies  under  the  name  of  the 
United  East  India  Company,  which  for  a  century  held  despotic 
sway  over  England's  commerce  in  the  East.  During  the  first 
half  of  the  seventeenth  century  the  East  India  Company  re- 
tained purely  a  commercial  character,  but  being  situated  far  from 
the  protection  of  the  home  government,  beyond  the  watchful 
supervision  of  consuls  and  ambassadors,  it  became  necessary  that 
the  company  should  be  able  to  defend  itself  and  redress  its  own 
wrongs.  Thus  a  military  character  was  attached  to  trading,  and 
forts  and  garrisons  were  built. 

Owing  to  the  contests  between  the  native  princes  after  the 
Great  Mogul  dynasty  fell,  the  French  in  1750  undertook  to 
Conflicts  with  destroy  English  power  in  India,  and  well  nigh 
the  French  succcedcd,  too,  but  owiug  to  the  valor  of  Lord 

Final  Result  Q\{yQ^  formerly  a  clerk  in  the  company's  office  at 
Madras,  the  French  were  defeated,  the  native  princes  made  vas- 
sals, and  a  large  part  of  Indian  territory  brought  under  English 


92  HISTORY    OF    COMMERCE. 

control.  From  that  time  until  Napoleon  there  were  more  or  less 
of  conflicts  in  India  between  the  English  and  French,  with 
odds  in  favor  of  the  former.  In  1767  Parliament  decided  to 
claim  a  share  in  the  government  of  the  territory  thus  acquired, 
and  appointed  Warren  Hastings  first*  governor-general.  Under 
his  administration  and  those  of  his  successors  extensive  ad- 
ditions were  made  to  English  territory  during  the  next  fifty 
years.  Meanwhile  the  power  and  commercial  supremacy  of  the 
United  East  India  Company  declined.  Its  servants  committed 
the  greatest  extravagances  and  frequently  returned  home  to 
England  with  immense  fortunes,  while  the  company  itself  was 
frequently  in  financial  difficulties.  In  1813  Indian  trade  was 
by  act  of  Parliament  thrown  open  to  private  enterprise,  and  in 
1833  the  Company  was  compelled  to  abandon  entirely  its  trading 
character.  Its  functions  continued  politically  until  the  Great 
Mutiny  of  1857  gave  it  the  death  blow.  In  1858  Queen 
Victoria,  by  proclamation  to  the  native  chiefs  and  princes,  took 
over  the  government  of  India,  and  in  1877  she  formally  assumed 
the  title  of  Empress  of  India. 


CHAPTEE  X. 

COMMERCE  OF  ENGLAND— Continued. 

MANUFACTURING;     POSTAL     SYSTEM;     BANKING;     SPECULATION; 
COLONIAL  POLICY. 

From  exporting  her  wool  and  importing  her  manufactures 
as  England  had  done  during  the  Middle  Ages,  she  had  in  the 
seventeenth  century  risen  to  the  position  of  a  manufacturing 
nation,  sending  large  quantities  of  cloth,  metals  and  eastern 
products  brought  first  to  England,  to  her  colonies  and  to  the 
lands  along  the  Baltic  and  Mediterranean.  Thus  we  see  her 
England  as  a  importing  the  products  of  Turkey  and  India  or 
Na°orNav°!  ^^6  fish  of  Ncw  Fouudlaud  and  re-shipping  them 
gation  Acts  to  Fraucc,  Russia,  Spain  and  Italy.    Her  trade  in 

woolens  with  the  Netherlands  continued  in  a  prosperous  con- 
dition while  her  colonial  trade  developed  rapidly.  The  carrying 
trade  was  yet  largely  in  the  hands  of  the  Dutch,  and  in  order 
to  stimulate  English  ship-building  so  as  to  handle  this  trade 
herself,  and  cripple  the  Dutch,  Cromwell  in  1651  had  laws 
enacted,  called  the  Navigation  Acts,  by  which  vessels  built  in 
England  or  a  British  colony  alone  could  be  employed  in  the 
importation  of  goods  into  England  from  the  three  continents 
of  Asia,  Africa  and  America,  while  European  merchantmen  could 
introduce  into  British  ports  only  the  produce  of  the  nations  to 
which  they  belonged.  English  ownership  of  vessels  engaged 
in  foreign  trade  thus  became  a  necessity,  and  the  officers  and  at 
least  two-thirds  the  crew  were  required  to  be  native  born. 
These  laws  continued  in  force  until  1825  and  no  doubt  gave 
a  great  impetus  to  shipping,  enabling  England  to  gradually 
obtain  control  of  much  of  the  carrying  trade  of  the  world,  an 
acquisition  which  she  has  continued  to  hold  up  to  the  present 
time. 

98 


94  HISTORY    OF    COMMERCE. 

Under  Cromweirs  wonderful  energy  affairs  improved.  War 
ceased  and  prosperity  for  a  time  became  more  general  than  it 
had  been  for  two  generations  before.  Agriculture  continued  to 
improve  and  manufactures  advanced.  The  manufacture  of  cotton 
goods  had  its  inception  about  this  time.     A  cheap  and  efficient 

postal  service  was  established  under  government 
Postl"  syltem       coutrol  and  security,  thus  greatly  facilitating  trade 

and  industry.  Prior  to  this  time  many  modes  of 
conveying  letters  had  been  in  vogue,  but  Cromwell,  by  the  Act 
of  1656,  organized  a  postal  department  of  the  government, 
appointed  a  postmaster-general  and  established  a  system  of 
post-roads  throughout  the  realm.  Thereafter  the  occupation  of 
carrying  the  mails  was  forbidden  to  private  individuals.  One 
object  of  the  act  was  to  discover  and  prevent  wicked  and  danger- 
ous designs  against  the  government,  by  exercising  a  censorship 
over  the  mails.  Home  and  foreign  commerce  steadily  advanced. 
As  manufacturing  and  ship  building  increased,  foreign  markets 
were  sought  and  found  for  English  products.  The  commerce 
of  the  Netherlands  was  now  on  the  decline,  partly  owing  to'  the 
persecutions  of  the  Spanish  king  and  partly  as  the  effect  of  the 
Navigation  Acts.  Germany,  another  competitor  of  England, 
Progress  ot  ^^^^   Severely   injured   by   the   Thirty-years'    war 

English  (1619-1648),    and    with    these    two    competitors 

Manufactures  practically  out  of  the  race,  English  commerce  went 
forward  with  increasing  vigor  and  facility.  Immigration  from 
the  Flemish  manufacturing  centers  was  encouraged,  and  thou- 
sands of  weavers  and  dyers  came  to  England  bringing  their 
skill  and  sober  habits,  as  an  addition  to  the  wealth  of  the  realm. 
At  about  this  time  also,  Louis  XIV  of  France  committed  his 
egregious  mistake — which  cost  his  country  so  much  and  bene- 
fited England  accordingly — of  expelling  the  Huguenots  or 
French  Protestants,  by  the  revocation  of  the  Edict  of  Nantes 
(1685)  and  50,000  of  his  most  skillful  artisans  went  over  to 
England,  carrying  with  them  an  accumulated  capital  of  not  less 


BANKING    SYSTEM.  96 

than  £3,000,000.  These  gave  a  new  impetus  to  the  manufact- 
uring interests  of  Britain,  and  greatly  benefited,  especially  the 
silk,  glass,  paper  and  hardware  trades.  From  the  teaching  of 
these  exiles  the  quality  of  English  manufactures  showed  a  marked 
improvement,  and  tissues  of  silk,  wool  and  linen  soon  attained  a 
high  degree  of  perfection.  Irish  linen  from  home  grown  flax 
attained  a  world  wide  renown  from  this  period. 

It  had  been  customary  for  London  merchants  to  deposit 
their  funds  with  the  mint  for  safe-keeping,  but  Charles  I 
seized  their  funds,  as  a  forced  loan,  and  thus  not  only  destroyed 
the  government  credit  but,  by  the  same  act,  put  an  end  to  the 
custom.  City  goldsmiths  of  high  repute  were  next  entrusted 
Origin  of  the  ^^^^  Valuable  deposits,  and  they  paid  the  mer- 
Banking  chauts  interest  and  issued  a  form  of  negotiable 

ystem  receipt,  similar  in  effect  to  our  bank  notes.    These 

goldsmiths  were  money  lenders  and  made  advances  to  the  gov- 
ernment in  times  of  need,  taking  as  security  mortgages  on  future 
revenues.  They  advanced  to  Charles  II  the  sum  of  £1,300,000, 
at  eight  or  ten  per  cent,  interest,  upon  the  security  of  the  taxes. 
Charles  in  1672  refused  to  repay  the  loan,  saying  they  must  be 
content  with  the  interest,  and  this  caused  widespread  panic  and 
financial  disaster.  William  Paterson,  a  Scotchman,  then  came 
forward  and  offered  to  provide  the  government  with  £12,000,000, 
to  be  repaid  by  taxes  on  beer  and  other  liquors.  The  outgrowth 
of  the  whole  matter  was  the  establishment  in  1694  of  the  Bank 
of  England,  an  institution  which  has  been  a  powerful  element 
in  the  commercial  progress  and  greatness  of  England,  as  well  as 
a  balance-wheel  to  the  world  of  finance.  After  the  great  bank 
was  established  the  business  of  banking  became  an  avowed  prac- 
tice, and  men  who  could  inspire  confidence  by  their  character 
and  wealth  became  bankers  and  found  the  pursuit  lucrative. 

At  about  the  time  John  Law  was  promoting  his  Mississippi 
scheme  of  reckless  speculation  in  France  the  English  were 
launching  a  similar  wild  project  of  the  most  visionary  character, 


96  HISTORY    OF    COMMERCE. 

now  known  as  the  South  Sea  Bubble.  By  this  scheme  they  pro- 
posed to  pay  off  the  national  debt  and  all  grow  rich  at  a  stroke. 
The  shares  of  the  East  India  Company  were  at  a  high  premium 

and  the  Bank  of  England  promised  wonders,  why 
Bubbir*'^*'*      not  all  get  rich  in  stocks?    John  Blount,  director 

of  an  insolvent  company  trading  in  the  South  Seas, 
from  which  not  a  penny  of  a  dividend  had  been  collected  in  ten 
years,  persuaded  an  easy  ministry  that  he  could  wipe  out  the 
national  debt  if  granted  an  exclusive  charter  to  the  rich  gold 
mines  yet  undiscovered  in  the  lands  of  the  South  Seas  and  all 
the  teeming  fisheries  which  might  exist  there.  Parliament  made 
the  grant,  and  the  directors  began  selling  stock.  The  premium 
went  higher  and  higher  until  it  reached  more  than  1,000  per 
cent.  Eich  and  poor  alike  embarked  their  means  in  the  confi- 
dent assurance  of  making  a  fortune.  Shrewd  bankers  accepted 
the  stock  as  collateral  for  loans  which  ordinarily  they  would  not 
have  considered.  Hundreds  of  visionary  companies  were  formed 
and  worthless  stocks  were  floated  to  the  amount  of  over  £500,- 
000,000 — more  than  all  the  gold  and  silver  in  the  world,  and 
exceeding  several  times  the  value  of  the  landed  property  of 
England.  The  bubble  burst  in  1720.*  Bankers  and  goldsmiths 
failed,  dragging  down  thousands  with  them.  Many  opulent 
families  were  brought  to  beggary  and  untold  misery  resulted 
among  the  poor.  Like  every  other  scheme  the  object  of  which 
is  the  making  of  something  out  of  nothing,  the  South  Sea  Bubble 
exploded  and  left  widespread  ruin.  So  clamorous  were  the  peo- 
ple for  some  satisfaction  for  their  losses  that  Parliament  was 
obliged  to  interfere,  and  not  only  distribute  the  meager  assets 
of  the  company  among  its  victims  but  punish  the  offenders. 
Several  of  the  directors  were  imprisoned,  and  all  were  fined 
to  an  amount  aggregating  several  million  pounds. 

While  the  events  previously  enumerated  were  transpiring  at 


♦The  pin  that  pricked  the  bubble  was  the  discovery  that  Sir  John  Blount 
and  other  promoters  of  the  scheme  had  quietly  disposed  of  their  stock. 


COLONIAL    POLICY.  97 

home,  England  was  developing  a  colonial  empire  of  large  pro- 
portions in  America.  Had  her  statesmen  pursued  the  same 
liberal  and  enlightened  policy  towards  her  American  Colonies  at 
that  time  which  characterizes  her  present  system  of  colonial 
government,  she  might  have  continued  to  hold  and 
Colonial  Policy  coutrol  her  American  possessions  indefinitely,  but 
instead  she  proceeded  upon  the  false  theory  that 
her  colonies  were  proper  subjects  to  be  governed  and  exploited 
for  the  benefit  of  the  mother  country — a  theory  which  has  been 
steadily  pursued  by  Spain  up  to  the  present  time,  resulting  in  the 
loss  of  almost  all  of  her  colonial  possessions.  All  imports  to 
the  colonies  from  any  other  country  in  Europe  were  forbidden 
in  order  to  give  English  manufacturers  a  monopoly  of  the  Ameri- 
can trade.  Then  in  1660  an  act  was  passed  prohibiting  the 
colonies  from  exporting  certain  enumerated  articles  to  foreign 
countries  without  being  first  brought  to  England  and  there 
unladen  and  then  re-shipped  by  English,  merchants.  The 
enumerated  articles  were  tobacco,  sugar,  corn,  iron,  molasses, 
ginger,  cotton,  indigo,  coffee,  skins  and  lumber — just  the  com- 
modities which  the  American  and  West  Indian  colonies  produced 
in  most  abundance. 

The  colonists  were  not  only  compelled  to  sell  their  surplus 
products  through  English  merchants  and  send  them  in  English 
vessels,  but  they  were  equally  forced  to  buy  all  imported  goods 
from  England.  An  act  was  passed  in  1663  prohibiting  any 
article  from  being  sent  into  the  colonies  except  the  same  was 
sent  from  an  English  port  and  in  an  English  ship.  Home  manu- 
factures among  the  colonies  were  discouraged  and  suppressed. 
Woolen  manufactures  were  forbidden  in  1719  and  iron  in  1750. 
Colonial  hatters  were  not  allowed  to  send  hats  from  one  colony 
to  another.  Thus  the  colonists  were  hampered  and  forced  to  pay 
unjust  tribute  to  home  ships  and  merchants.  This  unfair  and 
narrow-minded  policy  caused  much  discontent  and  irritation 
among  the  Americans,  and  was  openly  and  ably  opposed  by  an 


98  HISTORY    OF    COMMERCE. 

element  in  Parliament  headed  by  the  great  statesman  William 
Pitt,  but  without  result.  Finally  the  culmination  came  on  the 
celebrated  occasion  when  the  citizens  of  Boston  emptied  a  ship- 
load of  East  Indian  tea  into  their  harbor,  and  war  was  openly 
declared  and  begun  in  1775. 

We  have  now  reached  a  period  in  history  celebrated  for  social, 
political  and  industrial  revolutions.  During  the  last  quarter  of 
the  eighteenth  century  the  human  mind  seems  to  have  awakened 
to  a  new  development  and  realization  of  its  possibilities.     The 

principles  of  republican  government  were  enun- 
Revoiutk)ns         ciatcd  by  the  American  colonists  in  1775,  and  their 

war  of  independence  fought  to  a  successful  issue 
in  1783.  The  doctrine  that  the  power  of  the  state  resided  in  the 
people  and  not  in  the  sovereign  was  the  seed  which,  transplanted 
to  French  soil,  ripened  into  the  great  social  and  political  revolu- 
tion of  France  in  1789.  In  England  during  this  period  a  mighty 
though  silent,  industrial  revolution  was  going  on,  occasioned  by 
the  invention  of  improved  machinery  and  the  introduction  of 
steam  power.  Prior  to  this  time  nearly  all  of  the  manufacturing 
in  England,  as  well  as  other  countries,  had  been  done  by  hand 
in  the  homes  or  little  shops  of  the  workmen,  aided  by  their 
families  and  apprentices.  The  methods  were  crude,  tedious  and 
difficult,  causing  manufactured  goods  to  be  both  imperfect  and 
expensive.  A  series  of  useful  inventions  following  closely  upon 
each  other  changed  all  this,  increased  the  power  of  production 
in  mining,  manufacturing  and  agriculture  a  hundredfold  or 
more,  and  made  England  the  richest  nation  in  the  world. 

Henceforth  by  the  use  of  labor-saving  machinery  men  were 
able  to  produce  not  only  better  wares  and  of  more  uniform 

quality,  but  in  far  greater  quantities  in  proportion 
System^  ""^        to  the  labor  employed,  and  hence  much  cheaper 

in  cost.  But  in  order  to  utilize  this  machinery 
it  became  necessary  that  workmen  should  congregate,  and  thus 
the  introduction  of  machinery  brought  about  the  factory  sys- 


FACTORY    SYSTEM.  99 

tern.  Costly  and  intricate  machines  as  well  as  buildings  in  which 
to  conduct  the  work  were  necessary.  This  required  the  amassing 
of  capital — a  new  feature  of  the  industrial  problem.  At  first 
factories  were  located  near  streams  where  water  power  could  be 
obtained,  but  with  the  advent  of  the  steam  engine  they  could  be 
located  near  towns  where  there  was  an  abundant  labor  supply, 
and  as  the  means  of  transportation  improved,  less  regard  need 
be  had  for  the  location  of  the  raw  product.  The  introduction 
of  the  factory  system  marked  an  era  in  the  industrial  progress 
of  England  and  the  world,  and  the  bringing  of  workmen  together 
and  into  more  intimate  association  with  each  other  had  a  radical 
influence  upon  them  intellectually. 

Chief  among  the  inventions  which  brought  about  this  indus- 
trial revolution  was  the  steam  engine  of  James  Watt,  who  took 
out  his  patent  in  1769.  This  was  preceded  in  1767  by  the  spin- 
ning jenny  invented  by  James  Hargreaves,  whereby  many  threads 
could  be  spun  at  once  instead  of  a  single  thread  as  heretofore, 
and  this  to  be  followed  later  with  improvements  in  the  methods 
of  spinning  and  weaving  wool  and  cotton  by  Arkwright,  Cromp- 
ton,  Cartwright  and  others.  These  inventions  completely  revo- 
lutionized the  manufacture  of  cotton  and  woolen  goods,  and 
these  industries  went  forward  with  a  bound.  Manchester  at- 
tained great  importance  on  account  of  the  magnitude  of  its 
factories.  Liverpool,  hitherto  a  straggling  fishing  town,  became 
a  leading  city,  importing  large  quantities  of  raw  cotton  and  ex- 
porting the  finished  goods.  Silk  manufacture  was  similarly 
promoted.    The  construction  of  machinery  necessitated  the  use 

of  coal  and  gave  a  new  impetus  to  mining,  while 
Inventions  *^®  ^^^®  ^^  ^^^  stcam  engine  enabled  the  miners  to 

pump  the  water  out  of  the  mines — a  thing  which 
they  had  not  been  able  to  do  by  means  of  the  crude  hand  pumps 
formerly  used.  Processes  of  smelting  and  developing  ore,  and 
the  manufacture  of  steel  were  greatly  improved.  Birmingham 
and  Sheffield  date  their  vast  hardware  and  cutlery  trade  from 


100  HISTORY    OP    COMMERCE. 

the  invention  of  the  puddling  furnace  by  Cort  in  1783,  whereby 
wrought  iron  was  produced  by  the  use  of  the  coal  found  in  close 
proximity  to  both  the  ore  and  the  limestone  which  is  used  as  a 
flux.  By  means  of  this  invention  immense  quantities  of  ore  were 
utilized  which  would  otherwise  have  been  worthless. 

Following  closely  upon  the  inventions  enumerated  above 
came  the  Napoleonic  wars,  which  engaged  the  most  of  the  con- 
tinent and  threw  a  large  share  of  European  commerce  into 
English  hands.  At  a  prodigious  cost  immense  armies  were 
Commerce  kept  in  the  field  against  France,  and  to  supply  the 

N^apofeonic  wauts  of  thcsc  required  the  employment  of  an  in- 

Wars  dustrial  army  at  home.     England  had  the  advan- 

tage that,  while  being  a  participator  in  the  war,  her  fields  and 
cities  were  not  devastated  nor  her  territory  invaded  by  the 
armies.  Prices  were  high  and  English  goods  in  great  demand. 
Thus  the  period  of  war  was  a  commercial  advantage  to  England. 
Meanwhile  the  development  of  the  industries  resulted  in  a 
great  improvement  in  the  means  of  transit  and  commerce  through- 
out Britain.  Goods  manufactured  must  be  sold  and  transported, 
and  better  means  of  carrying  were  needed.  Paths  for  pack- 
horses  were  converted  into  wagon  and  cart  roads,  canals  were 
built,  rivers  cleared  and  utilized,  and  the  way  thus  paved  for  the 
introduction  of  steam  power  to  locomotion  a  little  later. 

After  the  fall  of  Napoleon  and  the  restoration  of  peace 
throughout  Europe  in  1815,  there  came  a  period  of  reaction  and 
commercial  depression  in  England  which  lasted  ten  years.  This 
was  caused  chiefly  by  the  efforts  of  continental  nations  to  revive 
their  own  shattered  industries  by  means  of  severe  protective 
tariffs,  which  practically  shut  out  English  manufactures.  A 
After  the  scrics  of  bad  harvests  coming  about  the  same  time, 

^poeonic  together  with  the  high  taxes  incident  to  the  war, 

1815  to  1825  placed  the  country  in  a  severe  strait.    The  distress 

was  aggravated  by  the  so-called  "Corn  Laws,"  which  were  en- 
acted as  a  means  of  relief  to  the  farmers,  and  provided  that  no 


COLONIAL    POSSESSIONS.  101 

corn  should  be  imported  unless  the  price  was  80s  a  quarter.* 
The  result  was  expensive  bread  for  the  working  classes,  and  the 
many  substitutes  resorted  to  for  bread  raised  the  price  of  other 
foods.  Riots  and  public  meetings  were  held  among  the  mining 
and  manufacturing  districts  throughout  the  whole  of  England. 
The  period  of  greatest  distress  was  from  1817  to  1819,  and 
during  that  time  the  strong  arm  of  the  government  was  neces- 
sary to  maintain  peace  and  order.  In  1819  came  a  severe 
financial  panic,  and  in  the  single  year  no  less  than  3,552  bank- 
ruptcies occurred  in  England  alone.  Gradually  an  improvement 
came.  The  Bank  of  England  resumed  specie  payment  in  1821. 
Injurious  laws  and  restrictions  were  modified,  business  with  the 
colonies  increased  and  commerce  revived. 

During  this  period  of  war  and  commercial  depression  at 
home  England  was  growing  rich  in  colonial  possessions  abroad. 
She  not  only  defeated  the  French  in  India  as  previously  stated, 
and  extended  her  holdings  in  that  direction,  but  acquired  Ma- 
lacca, Ceylon  (1796)  and  the  Cape  of  Good  Hope  (1806),  besides 
Australia  and  many  minor  dependencies.  Captain  Cook  had 
discovered  New  Zealand  in  1769,  and  by  his  advice  in  1788  a 
shipload  of  convicts  were  sent  out  and  Sidney  was  founded  as  a 
Growth  of  penal  colony.    A  few  sheep  were  carried  thither  in 

Colonial  1797,  and  the  fine  pastures  proved  wonderfully 

ossessions  adapted  to  their  rearing.  The  wool  was  of  such 
excellent  quality  that  this,  together  with  gold,  subsequently 
made  Australia  one  of  England's  richest  and  most  important 
colonies. 

The  period  of  1825  to  1850  may  be  said  to  mark  the  tran- 
sition stage  from  protection  to  free  trade  in  England's  com- 
mercial policy.  Prior  to  this  time  more  or  less  severe  restric- 
tions had  been  placed  upon  manufacturing,  agriculture  and  com- 
merce.   Numerous  monopolies  had  been  granted,  as  in  the  case 


*A   quarter   equals   8.252   bushels   in   our   measure   and    80s   per   quarter 
would  be  equivalent  to  about  $2.36  per  bushel. 


102  HISTORY    OF    COMMERCE. 

of  the  Hudson  Bay  and  East  India  Companies.  The  Navigation 
Acts  passed  in  1651  continued  in  force,  and  every  commodity, 
raw  and  manufactured,  was  fettered  with  customs  or  excise 
duties.  A  radical  change  in  England's  policy,  requiring  twenty- 
five  years  for  its  consummation,  was  now  to  take  place.  In 
The  Change  1820  a  Company  of  London  merchants  sent  up  a 

tiorto^Frl?"  petition  to  Parliament,  praying  that  all  duties  ex- 
Trade  cept  for  purposes  of  revenue  might  at  once  he 
repealed.  A  similar  petition  came  from  the  Chamber  of  Com- 
merce of  Edinburgh.  Parliament  appointed  a  committee  to  in- 
vestigate the  question,  and  the  report  of  the  committee  was 
unanimously  in  favor  of  granting  the  relief  asked.  The  Naviga- 
tion Acts  were  at  once  modified  and  their  severity  relaxed.  The 
duties  on  raw  silk  and  wool  were  reduced  despite  the  opposition 
of  the  wool  growers.  A  Eeciprocity  Bill  was  introduced  by 
Mr.  Huskisson,  President  of  the  London  Board  of  Trade,  and 
passed  by  Parliament,  giving  foreign  ships  equal  advantages  in 
England  to  those  accorded  English  ships  trading  in  for^eign 
ports.  For  a  period  of  nearly  twenty-five  years  the  pendulum 
of  public  sentiment  was  swinging  in  the  direction  of  free  trade, 
but  it  was  not  until  1849  that  the  Navigation  Acts  were  entirely 
repealed,  the  Corn  Laws  abolished,  and  England  had  committed 
herself  unreservedly  to  the  policy  of  free  trade. 

Meanwhile  the  mighty  impulse  given  to  the  iron  trade  and 
the  application  of  steam  to  transportation  by  land  and  water 
were  developing  commerce  and  the  industries  to  a  still  greater 
degree.  Fulton  had  demonstrated  the  use  of  steam  for  the  pro- 
pulsion of  ships  in  1807,  and  in  1838  the  first  steamship.  The 
Great  Western,  crossed  the  Atlantic.  The  voyage  to  America 
Application  which  had  hitherto  required  five  or  six  weeks  was 

of  steam  to  now  Suddenly  reduced  to  a   little  more  than  a 

Transportation  ^^^^^  rpj^^  British  fleet  of  merchant  vessels  in- 
creased to  twelve  or  fourteen  times  its  size  of  thirty  years  be- 
fore, and  under  free  trade,  England  became  the  focus  for  shipsi 


STEAM    POWER.  108 

of  other  nations  bearing  the  products  of  nature  and  art  from 
every  clime,  and  returning,  radiated  from  the  same  ports 
freighted  with  English  manufactures  for  world-wide  use.  The 
invention  of  the  telegraph  in  1846  was  another  great  step  in 
advance,  and  with  the  penny  post  the  means  of  communication 
became  so  improved  that  supply  and  demand  were  regulated, 
extensive  fluctuations  in  prices  avoided,  and  a  steady  and  healthy 
commerce  promoted.  The  discovery  of  gold  in  Australia  in  1851 
led  to  extensive  emigation  to  that  colony,  vastly  increasing 
the  colonial  trade  of  England.  Within  ten  years  gold  was 
sent  to  the  mother  country  to  the  amount  of  £100,000,000. 
This  influx  of  the  precious  metal  by  cheapening  money  raised 
prices  of  commodities  generally,  and  thus  stimulated  production. 
The  opening  of  the  Suez  Canal  in  1869  afforded  a  shorter  and 
quicker  route  to  the  East,  and  led  to  an  extension  of  commerce 
with  India,  China,  Australia  and  the  East  Indies. 
Poslelsions  "^^^  culture  of  cotton  was  introduced  into  Aus- 

tralia, and  given  a  great  impetus  in  1861-1865  by 
the  scarcity  of  the  American  fiber,  occasioned  by  the  war  of  the 
Rebellion  which  blockaded  American  ports,  and  soon  Australian 
cotton  rivaled  in  quality  the  celebrated  "Sea  Island"  growth. 
Besides  copper,  tin,  iron,  wine  and  wheat,  wool  also  came  from 
Australia  in  large  quantities.  From  India  and  Ceylon  came 
cotton,  indigo,  jute,  rice,  wheat,  horns,  hides,  tea  and  coffee. 
Thus  England's  eastern  possessions  continued  to  expand,  while 
roads,  canals,  railroads  and  telegraph  lines  were  constructed 
throughout  those  colonies. 

The  English  acquired  the  Cape  of  Good  Hope  (called  Cape 
Colony)  from  the  Dutch  in  1806.  North  of  this  colony  were  the 
independent  states  of  the  Transvaal  Eepublic  and  the  Orange 
Free  State,  still  occupied  by  Dutch  Boers.  These  settlers,  who 
kept  up  a  close  intercourse  with  Holland,  were  engaged  prin- 
cipally in  the  rearing  of  sheep  and  the  production  of  wool, 
which  latter  was  their  chief  export.    Natal,  a  newer  British  de- 


104  HISTORY    OF    COMMERCE. 

pendency  than  Cape  Colony,  was  of  growing  importance  and 
produced  arrowroot  and  sugar  in  considerable  quantities.  En- 
gland exported  to  her  South  African  possessions 
South  Africa  apparel,  furniture,  cloths,  iron,  hardware,  leather 
and  machinery,  and  in  turn  received  from  them 
diamonds,  gold,  ivory,  feathers  and  wool.  The  extensive  dia- 
mond fields  proved  a  great  attraction,  as  the  supply  of  the 
precious  stones  was  said  to  be  inexhaustible,  and  the  Boers  were 
gradually  pressed  back.  In  order  to  secure  more  Boer  terri- 
tory, a  mock  contest  was  gotten  up  between  a  native  chief  and 
the  Boers,  and  by  misrepresentation  to  the  Boers  a  British 
referee  was  actually  appointed  to  decide  the  dispute.  The  decis- 
ion was  adverse  to  the  Boers  and  the  territory  was  immediately 
ceded  to  the  English.  Friction  between  the  English  and  Dutch 
continued,  until  finally  in  1899  open  warfare  was  begun,  result- 
ing in  a  conflict  lasting  nearly  three  years.  At  fearful  cost  of 
men  and  supplies,  England  subdued  her  antagonist  and  annexed 
the  territory  of  the  Boer  republics  to  the  British  Crown,  the  one 
under  the  name  of  the  Transvaal  Colony  and  the  other  as  the 
Orange  Eiver  Colony. 

The  heavy  draft  upon  the  English  treasury  occasioned  by 
the  South  African  war;  the  decline  in  the  shipping  interests  of 
the  United  Kingdom  and  the  sale  of  several  large  steamship 
lines  to  American  capitalists;  the  severe  decline  in  the  acreage 
of  wheat  in  the  United  Kingdom  (from  3,750,000  acres  in  1872 
to  2,000,000  in  1902),  with  similar  decline  in  the  acreage  of 
com,  together  with  the  fact  that  Germany,  France  and  the 
England's  United  States  have  entered  the  field   of  manu- 

Commerciai  facturc  as  scvcrc  Competitors  of  England,  and  have 

Condition  even  sccured  important  English  contracts  in  steel 

construction,  have  given  rise  to  serious  doubts  whether  the  United 
Kingdom  will  continue  to  lead  the  commerce  of  the  world.  The 
overwhelming  balance  of  trade  between  England  and  the  United 
States  is  now  against  England,  and  if  this  should  continue  for 


RECENT   COMMERCE.  105 

a  series  of  years,  America,  instead  of  being  a  debtor,  would  then 
become  a  creditor  nation,  our  dividends  and  interest  would  re- 
main at  home  instead  of  going  to  England,  and  the  financial 
center  of  the  world,  now  in  London,  would  again  move  to  the 
westward. 


CHAPTER  XI. 

COMMERCE  OF  THE  UNITED  STATES. 
COLONIAL  PERIOD;  FINANCIAL  POLICY;  WAR  OP  1812. 

By  the  treaty  of  Paris  in  1783,  the  American  Colonies  secured 
their  independence  and  became  the  owners  of  a  domain  embrac- 
ing 1,400  miles  of  sea  coast  and  consisting  of  827,844  square 
miles  of  rich  and  productive  land.  The  natural  resources  of 
this  vast  domain  embraced  every  species  of  raw  product,  animal, 
vegetable  and  mineral,  which  might  be  needful  in  the  growth 

and  upbuilding  of  a  nation  in  the  arts  of  agri- 
the"c^ionfes"*^      culturc,  manufacture  and  commerce.    At  that  time 

the  great  majority  of  the  population  lived  on 
farms,  but  three  and  one-third  per  cent,  having  their  homes  in 
the  towns  and  cities,  and  there  were  but  six  cities  having  a 
population  of  over  8,000.  Naturally  the  energies  of  the  people 
were  devoted  to  the  utilization  of  the  natural  products  of  the 
soil  and  forests.  Shipbuilding  early  became  an  important  in- 
dustry, owing  to  the  abundance  of  excellent  timber  along  the 
coast  and  rivers,  and  this  led  to  the  development  of  the  fishing 
industry.  New  England  ships  were  made  in  great  numbers, 
and  were  largely  engaged  in  whaling  and  in  the  cod  fisheries 
of  that  coast.  Dried  codfish  was  used  as  money  in  the  Massa- 
chusetts Colony  at  one  time,  and  was  one  of  the  chief  sources 
of  wealth  of  that  colony.  Whatever  of  foreign  commerce  ex- 
isted was  carried  on  chiefly  with  the  mother  country.  The 
northern  colonies  exported  timber  in  the  form  of  shingles  and 
ship  timber;  and  the  southern  colonies,  tobacco,  tar,  turpentine, 
rice  and  cotton. 

Several  of  the  colonies  made  early  attempts  at  the  manufact- 
ure of  woolen,  linen  and  cotton  goods  for  home  consumption, 

106 


UNDER    THE    CONFEDERATION.  107 

but  England  regarded  all  such  displays  of  colonial  enterprise 
with  a  jealous  eye.  She  wanted  no  rival  manufactories  in  her 
colonies.  It  had  been  the  uniform  policy  of  Spain  and  Portugal 
to  use  their  colonies  for  their  sole  benefit,  and  England  fell 
into  the  same  error.  The  English  idea  was  that  the  colonies 
should  produce  only  what  England  needed,  should  sell  to 
England  only,  and  in  return  buy  what  England  had  to  sell. 
Accordingly,  when  the  Americans  began  to  make  woolen  goods 
to  the  extent  of  diminishing  the  demand  for  English  woolens, 
Prohibition  of  they  wcrc  promptly  forbidden  to  export  wool  or 
M°Jnufactures  woolcu  goods  from  ouc  colouy  to  another.  When 
1650  they  turned  their  attention  to  the  production  of 

hats  they  met  a  like  prohibition  against  the  exportation  of  hats 
from  colony  to  colony,  and  the  number  of  hatter  apprentices 
was  limited  by  law.  When  they  made  an  attempt  to  smelt  a 
small  quantity  of  iron  ore,  for  their  daily  needs,  a  statute  was 
passed  which  permitted  the  importation  of  pig  iron  into  En- 
gland duty  free,  but  forbade  the  erection  of  "any  mill  for  slitting 
or  rolling  iron,  or  any  planting  forge  to  work  with  a  tilt-hammer, 
or  any  furnace  for  making  steel."  During  the  decade  of  1760 
to  1770,  wonderful  improvements  were  made  by  Hargreaves 
and  Arkwright  in  machinery  for  spinning  and  weaving,  and  the 
colonists  made  great  efforts  to  secure  some  of  these  machines,  but 
the  legislation  of  England  prohibited  the  exportation  of  ma- 
chines, tools,  plans,  and  even  the  immigration  of  any  one  who 
knew  how  the  machines  were  made.  By  these  means,  together 
with  the  navigation  laws  forbidding  trade  with  England,  includ- 
ing English  Colonies,  except  in  English  ships,  she  made  it  ex- 
ceedingly difficult  for  the  colonists  to  supply  themselves  with 
even  the  coarsest  articles  of  everyday  use. 

The  strained  relations  between  the  colonists  and  the  mother 
country  became  more  aggravated,  and  the  tie  which  had  bound 
them  together  for  a  hundred  and  fifty  years  was  broken  by  open 
hostilities  in  1775.     The    American    Eevolution    was    carried 


108  HISTORY    OF    COMMERCE. 

through  to  a  successful  issue,  but  peace  did  not  bring  prosperity,  ^i^ 
The  war  had  shattered  business,  sapped  the  brawn  of  the  country. 
The  Colonies        ^^^  thrown  the  states  heavily  into  debt.     The 
under  the  confederation  proved  weak  and  ineffectual.    It  had 

one  eration  ^^  power  to  enforce  its  determinations,  carry  out 
its  agreements  or  redress  its  injuries.  In  the  treaty  of  Paris  it 
was  promised  that  Congress  should  "use  its  influence"  to  secure 
the  payment  of  private  debts  due  to  Englishmen.  But  it  turned 
out  that  Congress  had  no  influence  and  the  debts  were  never 
paid.  In  consequence  the  British  refused  to  give  up  some  of 
the  military  posts  on  the  western  frontier.  American  ships 
were  captured  or  plundered  by  the  Barbary  pirates  with  im- 
punity, the  new  republic  being  powerless  to  fight  them.  * 

In  order  to  prosecute  the  war  of  the  revolution,  Congress 
issued  bills  of  credit,  which  were  to  pass  as  money.  This  con- 
tinental currency  at  first  was  taken  readily,  but  as  million 
after  million  was  printed  and  the  credit  of  the  Congress  ap- 
peared more  and  more  doubtful,  its  value  declined,  and  at  last 
it  grew  so  cheap  that  "not  worth  a  continental"  became  a  by- 
word to  express  utter  worthlessness.  During  the  summer  of 
1780  the  currency  became  so  depreciated  that  it  required  ten 
dollars  of  the  paper  to  make  one  cent.  Prices  rose  until  corn 
sold  in  Boston  at  $150  per  bushel  and  flour  $1,575  per  barrel. 

Samuel  Adams  is  said  to  have  paid  $2,000  in  paper 
Mcmey*"**^  money  for  a  suit  of  clothes,  and  Washington  to 

have  remarked  that  it  required  a  wagon  load  of 
money  to  buy  a  wagon  load  of  provisions.  The  people  of  Rhode 
Island  thought  they  had  hit  upon  a  solution  of  the  trouble,  and 
issued  a  legal  tender  paper  currency.  Any  farmer  could  borrow 
this  from  the  public  treasury  upon  security  of  one-half  the 
appraised  value  of  his  land.  Nevertheless  the  currency  de- 
preciated, and  all  their  efforts  to  keep  it  at  par  proved  futile. 
In  Massachusetts  riots  broke  out  in  opposition  to  the  efforts  of 
creditors  to  collect  their  debts,  and  discontent  and  lawlessness 
were  rife. 


UNITED   STATES   BANK.  109 

To  add  to  the  unfortunate  situation  the  states  became  in- 
volved in  quarrels  with  each  other.  Having  the  right  to  levy 
duties  on  imports,  they  set  out  to  compete  with  each  other  for 
foreign  commerce — the  one  building  up  its  trade  at  the  expense 
of  another.  They  went  a  step  farther  and  laid  taxes  on  goods 
imported  from  neighboring  states.  New  York  laid  a  duty  on 
Quarrels  imports  from  New  Jersey  and  Connecticut.    New 

between  the  Jcrscy  retaliated  by  taxing  the  New  York  light- 
^***^^  house  on  Sandy  Hook.    New  Hampshire  quarreled 

with  New  York  over  claims,  and  Pennsylvania  and  Connecticut 
wrangled  over  land  in  the  Wyoming  valley.  The  whole  state  of 
affairs  demonstrated  the  imbecility  of  the  government,  and  the 
country  was  steadily  drifting  into  hopeless  bankruptcy  and 
anarchy,  when  in  1787  a  convention  met  in  Philadelphia  to 
form  our  present  constitution,  which  went  into  effect  March  4, 
1789. 

With  the  organization  of  stable  government  came  a  revival 
in  business.  Commerce  and  manufactures  began  to  thrive  and 
expand  as  soon  as  men  could  begin  to  depend  on  the  future. 
General  distrust  and  uncertainty  gave  place  to  confidence  and 
faith  in  the  future  of  the  new  republic.  Trade  between  the 
states  was  no  longer  hampered  by  troublesome  tariffs,  and 
bickerings  ceased.  The  federal  government  was  able  to  collect 
its  revenues  and  its  obligations  were  promptly  met. 
Constitution*  Hamilton  as  Secretary  of  the  Treasury  formulated 
a  financial  system  which  bred  confidence  and  cre- 
ated a  national  credit.  Capital  began  to  move  in  the  develop- 
ment of  the  resources  of  the  country,  manufactures  began  to 
expand,  and  commerce  redoubled  its  activity.  The  federal  gov- 
ernment assumed  the  debts  of  the  states,  and  the  holders  of 
continental  script  suddenly  awoke  to  find  that  the  paper  which 
they  had  considered  of  doubtful  value  was  genuine  wealth. 

Hamilton  recommended  the  establishment  of  a  bank  of 
the  United  States,  with  branches  in  the  principal  cities.     The 


no  HISTORY    OF    COMMERCE. 

capital  of  the  bank  was  to  be  $10,000,000,  and  the  federal  gov-  ^ 
ernment  was  to  own  one-fifth  of  the  stock  and  appoint  one-fifth 
of  the  directors.  The  bank  was  to  be  a  depository  of  government 
money,  issue  paper  currency  payable  in  gold  or  silver  and  receiv- 
able for  all  dues  to  the  United  States,  and  transact  a  general 
banking  business.  The  proposition  aroused  the  fierce  objections 
of  those  who  feared  the  results  of  associating  government  with 
banking,  and  the  objection  was  at  once  set  up  that 
sute^Ba^nk  ^^®  Constitution  gave  Congress  no  specific  au- 
thority to  organize  a  bank.  Hamilton  then  laid 
down  the  doctrine  of  "implied  powers,"  claiming  that  Congress 
could  by  implication  do  anything  "necessary  and  proper"  to 
carry  into  effect  its  express  powers,  and  that  a  bank  was  such  an 
agency  for  the  conduct  of  the  finances  of  the  government.  This 
was  the  beginning  of  the  "loose  construction"  and  "strict  con- 
struction" theories  held  by  the  opposite  political  parties  to  the 
present  time.  The  bank  bill  was  passed  and  President  Washing- 
ton signed  it,  creating  the  United  States  Bank  with  a^charter  for 
twenty  years — 1791-1811.  The  bank  served  as  a  balance-wheel 
to  our  financial  system,  and  as  a  manufactory  of  credit,  by  giving 
stability  and  definiteness  to  the  currency,  and  enabling  the 
people  to  economize  the  use  of  capital.  Branches  were  estab- 
lished in  New  York,  Boston  and  six  other  cities,  the  parent 
bank  being  at  Philadelphia.  Secretary  Gallatin  strongly  recom- 
mended the  renewal  of  its  charter  in  1811,  but  after  a  vigorous 
debate  on  the  question  Congress  voted  it  down. 

Hamilton's  next  important  measure  was  the  establishment  of 
a  national  mint.  The  coins  in  use  throughout  the  states  were  a 
mixture  of  English,  French  and  Spanish,  gold,  silver  and  cop- 
per of  various  denominations,  weights  and  values.  The  English 
system  of  pounds,  shillings  and  pence  had  been  the  standard 
money  of  the  country.  To  Thomas  Jefferson  is  due  the  credit  for 
the  adoption  of  a  uniform  decimal  scale,  with  the  dollar  as  the 
unit.     Jefferson's  mint  bill  followed  closely  after  this  reform, 


FOREIGN    TRADE.  Ill 

and  reduced  the  metal  currency  of  the  country  to  a  uniform 
system  of  coins.  The  double  standard  of  gold  and  silver  was 
adopted,  with  a  ratio  of  fifteen  ounces  of  silver  to  one  of  gold. 
Establishment  '^^^  latter  being  then  the  dearer  metal  at  that  ratio, 
of  a  National        the  chcapcr,  silver,  drove  it  out  of  circulation,  and 

silver  and  paper  were  the  only  mediums  of  circu- 
lation. With  the  decimal  system  of  coinage  and  a  national 
mintage,  the  facilities  for  the  computation  of  values  and  trans- 
action of  business  were  greatly  improved. 

At  the  time  of  the  adoption  of  the  Constitution  the  exports 
of  all  kinds  of  the  new  republic  amounted  to  about  $20,000,000 
annually.  Of  this  amount  a  very  small  portion,  probably  not 
more  than  $1,000,000,  was  manufactured  goods,  for  it  must  be 
remembered  that  before  the  war  England*  had  thrown  almost 
insurmountable  hindrances  in  the  way  of  the  manufacturing 
industries  of  the  colonies.  Owing  to  the  scarcity  of  skilled  labor, 
and  its  consequent  high  price,  together  with  the  low  prices  pre- 
vailing, the  manufactures  of  the  country  picked  up  slowly  for 

the  first  few  years  after  the  close  of  the  war,  but  by 
Tonnage  Acts       ^'^^^  ^^^J  began  to  expand  with  great  rapidity. 

In  that  year  Congress  passed  a  tonnage  act,  which 
taxed  vessels  built  and  owned  by  the  United  States  six  cents  a 
ton;  those  built  but  not  owned  in  the  United  States  thirty  cents 
a  ton;  and  foreign  ships  fifty  cents  a  ton.  The  tariff  act  which 
was  passed  in  the  same  year  discriminated  in  favor  of  East 
Indian  goods  imported  direct,  as  against  the  same  goods 
imported  from  Europe.  Stimulated  by  these  provisions,  exports 
and  imports  rapidly  increased,  and  the  American  flag  went  to 
distant  parts  of  the  world.  New  England  ships  embarked  with 
cargoes  for  the  far  East  or  intermediate  ports,  to  bring  home 
in  return  immense  quantities  of  coffee,  spices,  tea,  silk,  nankeen 
and  other  cloths,  all  of  them  articles  of  great  value  in  com- 
parison with  their  bulk,  and  hence  yielding  good  profits  to  the 
carrying  trade.    Portions  of  these  cargoes  which  did  not  find  a 


113  HISTORY    OF    COMMERCE. 

ready  market  at  home  were  re-shipped  to  Hamburg  and  other 
European  ports.  Thus  American  commerce  rapidly  expanded, 
and  shipbuilding  became  more  active,  so  that  while  in  1789  less 
than  one-fourth  of  our  ocean  traffic  was  in  American  vessels,  in 
1792  less  than  one-fourth  was  in  vessels  not  American. 

An  untoward  combination  of  circumstances  in  Europe  arising 
about  this  time  proved  a  great  advantage  to  American  com- 
merce. The  French  Revolution  was  in  progress  and  had  moved 
beyond  control.  Thrones  were  in  danger.  France  had  been 
attacked  by  Germany  in  the  interest  of  the  "divine  right  of 
kings.''  England  became  involved,  and  in  1793  declared  war 
upon  France.  The  effect  of  this  war  was  to  further  stimulate 
American  manufactures  and  shipping.  Each  of  the  belligerent 
nations  needed  the  provisions  and  stores  which  the  Americans 
Effect  of  the  ^^^  stood  ready  to  furnish.  Under  the  colonial 
Napoleonic  systcms  of  England  and  France  commerce  with 

^^^^  their  colonies  was  confined  to  their  own  ships, 

but  the  British  navy  swept  French  merchantmen  from  the  seas 
and  visa  versa,  and  hence  the  colony  of  Louisiana  could  render 
France  no  help  in  the  form  of  supplies.  The  French  govern- 
ment therefore  threw  open  French  ports  to  American  vessels. 
The  sugar  of  the  West  Indies,  the  coffee  and  hides  of  South 
America,  and  the  provisions  of  America  were  thus  caiiied  se- 
curely into  France,  thus  greatly  increasing  our  foreign  com- 
merce. 

The  Middle  and  Southern  states  had,  as  colonies,  long  been 
raisers  of  cotton,  but  very  little  of  this  useful  fiber  had  been 
exported  until  after  the  adoption  of  the  Constitution,  owing 
chiefly  to  the  difficulty  of  separating  the  seed  from  the  fiber. 

This  process  has  been  accomplished  by  slow  and 
The  Cotton  Gin     tcdious  hand  labor  until  1794,  when  Eli  Whitney 

invented  his  cotton  gin,  one  of  the  first  and  most 
useful  inventions  of  America.  By  means  of  this  machine  cot- 
ton became  a  more  thoroughly  marketable  article,  and  its  pro- 


{    VNIVERSITY   j 
LOUISIAX2K^^^a^6ML  113 

duction  was  vastly  stimulated.  The  development  of  cotton 
raising  in  the  south  and  its  manufacture  in  the  north  began  with 
this  invention,  and  continued  to  develop  until  it  has  become  in 
recent  years  one  of  the  largest  articles  of  export  among  our  raw 
products. 

In  the  decade  from  1790  to  1800  the  population  of  the 
republic  increased  from  4,000,000  to  5,000,000.  Frenchmen 
came  from  San  Domingo  and  other  West  Indian  Islands;  Irish- 
men from  what  they  regarded  as  oppressions  in  Ireland;  Scotch- 
men, Englishmen  and  Germans  came  to  enjoy  the  advantages  of 
popular  government  and  escape  the  discontent,  monarchial  op- 
pressions and  wars  of  Europe.  These  foreigners  were  rapidly 
assimilated,  and  went  to  work  to  acquire  land  and  better  their 
condition.  The  tide  of  immigration  which  set  in 
Immigration  thus  early  in  the  history  of  the  republic  continued 
to  flow  hither  during  the  century  following.  Not 
being  able  to  compete  with  the  slave  labor  of  the  south,  these 
emigrants  avoided  that  section,  and  settled  along  the  east  and 
west  lines,  developing  the  great  West  and  carrying  their  skill 
and  thrift  to  the  borders  of  civilization. 

The  most  important  event  in  the  early  history  of  the  repub- 
lic was  the  Louisiana  purchase,  made  during  the  administration 
of  President  Jefferson,  by  which  the  United  States  acquired 
title  to  all  the  land  from  the  Mississippi  to  the  Rocky  Mountains 
and  from  the  Gulf  of  Mexico  to  British  America.  This  vast 
Purchase  of  domain  had  originally  belonged  to  France,  but  in 

Louisiana  1762   that  nation  transferred  it  to   Spain.     The 

^  Mississippi   River  was  the  natural   outlet  to   the 

Ohio  valley  and  the  northwest,  and  since  transportation  over  the 
Alleghany  Mountains  was  exceedins^ly  difficult  owing  to  the 
lack  of  suitable  roads,  it  became  highly  necessary  that  the  west- 
ern settlers  should  have  the  great  waterway  to  the  gulf  kept 
open.  The  Spanish  officials  at  New  Orleans  were  vexatious,  and 
hampered  the  commerce  of  the  Americans  with  useless  restric- 


114  HISTORY    OF    COMMERCE. 

tions.  In  1800  the  Territory  of  Louisiana  was  ceded  again  to 
France,  and  President  Jefferson  soon  after  sent  Mr.  Monroe  to 
Paris  as  a  special  envoy  to  act  in  conjunction  with  our  resident 
minister,  Mr.  Livingston,  and  if  possible  purchase  New  Orleans. 
Two  million  dollars  were  allowed  for  the  purchase.  Napoleon 
was  in  need  of  funds  to  prosecute  his  war  with  England,  and 
knowing  that  he  could  not  protect  his  colony  while  England 
ruled  the  sea,  proposed  to  sell  the  entire  province  of  Louisiana 
for  $15,000,000.*  The  commission  had  no  authority  to  make 
the  purchase  at  such  a  price,  and  it  was  impossible  to  communi- 
cate with  the  government  at  Washington  in  time  to  carry  through 
the  deal,  so  they  assumed  the  authority,  accepted  the  offer,  and 
trusted  to  the  President  and  Congress  to  ratify  their  acts.  This 
purchase  not  only  secured  the  desired  outlet  to  the  sea  by  water, 
but  doubled  our  national  area  and  added  immensely  to  the 
wealth  and  resources  of  the  nation. 

In  1807  Fulton  built  his  first  steamboat  on  the  Hudson 
River,  and  demonstrated  the  use  of  steam  in  propelling  ships. 
This  invention  exercised  a  vast  influence  upon  the  future  inland 
commerce  of  the  United  States,  and  was  a  potent  element  in 
developing  the  resources  of  the  country.  It  was  of  the  greatest 
importance  that  our  numerous  waterways  should  be  utilized  as 
channels  of  commerce,  but  this  was  impossible  until  the  applica- 
tion of  steam  power  was  invented.  Prior  to  this  event  travel  in 
the  interior  was  slow.     By  land  the  pioneer  wagons  were  heavy 

and  the  roads  dreadful;  by  water  the  farmers  near 
steamboats  the  rivcrs  floated  their  produce  down  to  market  in 

flat  boats,  and  poled  them  up  again.  Four  months 
were  consumed  in  making  the  return  journey  from  New 
Orleans  to  St.  Louis.    The  effect  was  that  the  farmer  paid  dearly 


*The  price  was  $11,250,000  payable  in  15-year  6  per  cent.  United  States 
bonds,  and  the  assumption  by  the  United  States  of  claims  of  American 
citizens  against  France,  amounting  to  $3,7.50,000.  Napoleon  agreed  not  to 
negotiate  the  bonds  at  a  price  which  would  injure  the  credit  of  the  United 
States. 


HOME    INDUSTRIES.  115 

for  all  articles  which  he  bought,  but  received  little  for  his  prod- 
uce. In  1811  Fulton  put  his  first  steamboat  on  the  Ohio  River 
at  Pittsburg,  and  the  results  were  marvelous.  By  1815  the  time 
from  New  Orleans  to  St.  Louis  was  25  days  and  in  1823  it  was 
reduced  to  12  days.  Freight  rates  were  rapidly  reduced  and 
prices  of  commodities  consumed  by  the  settlers  correspondingly 
fell;  while  on  the  other  hand  grain  and  provisions,  being  assured 
a  more  accessible  market,  rose  in  price.  Lines  of  packet  steam- 
ers were  established  on  all  the  principal  rivers,  and  developed  as 
rapidly  as  the  growth  of  the  carrying  trade  would  justify,  until 
the  river  commerce  of  the  country  became  very  extensive  and 
handsome  passenger  boats  were  plying  on  our  rivers.  This 
means  of  transportation  proved  of  immense  value  in  the  develop- 
ment of  the  country,  and  continued  until  the  demand  arose 
for  more  rapid  transportation,  and  the  general  era  of  railroad 
building  set  in  soon  after  the  Civil  War. 

During  the  period  just  prior  to  the  war  of  1812  the  prosperity 
of  the  young  nation  was  almost  phenomenal.  Its  foreign  com- 
merce had  grown  to  large  proportions  and  the  American  flag 
was  to  be  found  in  all  the  seas  and  harbors  of  the  world.  Home 
industries  were  equally  prosperous.  Raw  produce  was  varied 
and  abundant.  Motive  power  in  the  shape  of  rivers  and  torrents 
was  abundant,  and  steam  power  was  just  making  its  appearance. 
Labor  being  scarce,  labor-saving  machines  naturally  suggested 
themselves  to  an  ingenious  people.  Sawmills  multiplied  wher- 
ever timber  afforded  materials  for  house  and  ship  building,  and 
Home  Indus-  strcams  afforded  it  the  means  of  transportation, 
thevviror  Agricultural  implements  were  improved.  Cotton 
i8ia.  began  to  be  raised  on  an  extensive  scale  and  was 

woven  at  home  as  well  as  exported  raw.  The  products  of  the 
loom  could  not  for  many  years  compete  in  quality  with  those 
of  England  in  fineness,  but  they  were  stronger  and  more  durable, 
and  on  these  accounts  were  often  preferred.  Woolen  and  linen 
manufactures,  first  begun   on   a   small   scale,   were  afterwards 


116  HISTORY    OF    COMMERCE. 

developed  into  considerable  industries.  Hemp  and  flax  grew 
abundantly  and  furnished  the  materials  for  sacking,  cordage 
and  sailcloth.  Leather  became  an  important  article  of  manu- 
facture, and  in  some  of  the  forest  towns  of  New  England,  where 
hemlock  forests  abound,  extensive  tanneries  were  established. 
Iron  and  glass  from  small  beginnings  rose  to  be  important  indus- 
tries, while  paper  making,  one  of  the  humble  attempts  of  the 
young  republic,  developed  into  such  a  flourishing  branch  of 
manufacture  as  to  become  of  immense  extent  and  value.  Fish- 
eries were  vigorously  prosecuted  and  gave  employment  to  a 
large  population,  chief  of  which  were  the  cod  fisheries  of  New 
Foundland,  the  mackerel  and  the  whale  fisheries.  The  latter 
was  carried  on  in  the  Arctic,  Pacific  and  Southern  Oceans; 
whale-bone  and  whale  oil,  with  seal  oil  and  skins,  being  the 
valuable  products  of  these  enterprises.  In  the  year  1800  Ameri- 
can ships  amounting  to  130,000  tons  burden  were  engaged  in 
whaling. 

During  this  period  (1803-1812)  France  and  England  were  en- 
gaged in  a  gigantic  struggle.  All  Europe  was  affected,  and 
nation  after  nation  was  dragged  into  the  conflict.  England 
ruled  the  seas  and  Napoleon's  armies  were  invincible  on  land. 
America,  under  the  wise  policy  of  Washington,  remained  neutral, 
and  was  reaping  a  rich  harvest  in  her  foreign  commerce.  Ameri- 
can ships  swarmed  every  sea.  They  were  loaded  with  the  prod- 
ucts of  every  clime,  sailed  to  the  United  States,  broke  the 
Capture  of  ^oy^g^,  Unloaded  the  cargo,  immediately  reloaded 

American  it  again,  and  proceeded  to  France  and  Spain  to  dis- 

^***^*  pose  of  it.    The  English  admiralty  courts  had  held 

in  1800  that  while  it  was  illegal  for  the  ships  of  a  neutral 
to  carry  the  products  of  a  belligerent  to  or  from  that  belligerent's 
colony,  yet  where  the  goods  were  carried  from  a  belligerent 
colony  to  a  neutral  port,  unloaded,  and  entered  in  the  custom 
house,  they  could  then  be  sent  in  the  same  ship  to  a  belligerent, 
without  violating  international  law.     Under  this  decision  En- 


WAR    OF    1812.  117 

gland  saw  in  1805  that  France  was  prospering  and  her  colonies 
furnishing  her  with  produce  the  same  as  in  time  of  peace,  and 
this  under  the  sanction  of  an  English  court.  The  decision  was 
accordingly  reversed,  and  it  was  held  that  a  voyage  from  the 
United  States  to  a  belligerent  port  with  goods  from  a  belligerent 
colony  was  illegal.  Under  this  decision  American  ships  by 
the  score  were  captured  by  the  British  cruisers. 

Parliament  followed  up  the  matter  by  passing  in  1806  an 
Order  in  Council  declaring  the  whole  coast  of  Europe  under 
blockade,  and  prohibiting  any  ship  from  trading  in  any  of  these 
ports  without  a  British  license.  In  retaliation,  Napoleon  issued 
the  "Berlin  Decree"  declaring  the  coast  of  the  British  Isles  in 
a  state  of  blockade.  Thus  American  commerce  was  placed  at  the 
mercy  of  both  the  French  and  English.  As  a  result  over  1,600 
American  ships  were  captured  by  France  and  England  and  their 
cargoes,  worth  millions  of  dollars,  condemned  and  confiscated. 

President  Jefferson  struggled  against  these  out- 
WarofiSxa  rages  as  best  he  could.    The  people  were  hot  for 

war,  but  Jefferson  knew  that  the  nation  was  in 
no  condition  for  war,  and  hence  he  tried  "peaceable  coercion." 
Congress  passed  the  "Embargo  Act"  in  December,  1807,  declar- 
ing an  embargo  on  all  American  shipping.  Our  ports  were 
sealed  absolutely  to  foreign  trade.  Jefferson  believed  that  the 
loss  of  our  products  would  bring  England  to  terms.  The 
embargo  ruined  the  commerce  of  the  nation  for  the  time  being. 
The  price  of  wheat  fell  from  $2  to  75  cents  a  bushel,  and 
general  stagnation  and  business  distress  prevailed.  Prior  to 
the  embargo  the  British  had  claimed  and  exercised  the  right  to 
search  American  ships  for  British  subjects,  thousands  of  whom 
were  employed  in  the  American  merchant  marine,  owing  to  the 
higher  wages  paid  on  American  vessels.  This  right  of  search 
was  exceedingly  obnoxious  to  the  Americans.  The  Embargo 
Act  not  having  the  desired  effect  on  England,  war  was  declared — 
a  war  which  cost  the  United  States  $150,000,000,  besides  the 


118  HISTORY    OF    COMMERCE. 

destruction  of  a  profitable  commerce,  but  it  vindicated  American 
rights,  taught  the  young  republic  the  necessity  for  a  navy,  and 
laid  the  foundation  for  reciprocity  in  international  trade,  a 
principle  which  has  since  exercised  an  important  influence  on 
the  commerce  of  nations. 


CHAPTER  XII. 

COMMERCE  OF  THE  UNITED  STATES— Continued. 

REVIVAL    OF    MANUFACTURING;    TARIFF    LAWS;    SLAVERY; 
CIVIL   WAR. 

When  the  embargo,  followed  by  war,  withdrew  the  stimulus 
from  American  husbandry  by  destroying  the  market  for  our 
produce,  and  foreign  commerce  and  ship-building  were  at  a 
standstill,  the  people's  minds  were  thrown  back  upon  the  manu- 
facturing industries  of  the  country,  and  American  ingenuity  set 
to  work  to  improve  and  develop  these.  The  tariff  on  imported 
goods,  chiefly  English,  was  increased,  improved  machinery  was 
invented  for  working  up  raw  products,  especially  in  the  cotton 
industry  of  the  south,  inland  communication  was  improved  by 
Commerce  *^^  building  of  better  roads  and  the  construction 

after  the  War  and  Operation  of  steamboats  on  the  rivers.  After 
Panic  of  1819  ^j^^  treaty  of  peace  between  England  and  the 
United  States,  which  was  signed  at  Ghent,  December  24,  1814, 
and  the  defeat  of  Napoleon  at  Waterloo  in  the  following  spring, 
peace  reigned  universal  on  land  and  sea.  The  United  States 
found  itself  able  to  compete  with  the  monarchies  of  the  old 
world  in  the  race  for  commerce.  Its  vessels  went  again  to  all 
the  harbors  of  Europe,  and  new  avenues  of  trade  were  opened 
up.  The  exports  of  cotton  to  England  showed  a  remarkable  in- 
crease. In  1809  the  number  of  bales  exported  was  14,000,  in 
1819  this  export  was  175,000  bales.  Considerable  quantities  of 
grain,  rice  and  tobacco  were  also  sent  to  Europe,  while  to  the 
West  Indies  we  sent  our  staple,  flour.  Furs,  hides  and  other 
products  were  sent  to  India  and  China  to  be  exchanged  for  tea, 
some  of  which  was  exchanged  again  in  Germany  at  a  second 
profit.    The  one  serious  drawback  of  the  times  was  a  defective 

119 


120  HISTORY    OF    COMMERCE. 

financial  system.  Congress  had  refused  to  renew  the  Charter 
of  the  United  States  Bank  in  1811.  The  war  had  drained 
off  the  specie,  and  the  country  was  filled  with  depreciated  paper 
currency.  A  new  bank  was  organized  in  1817  to  improve  the 
situation,  but  it  was  mismanaged  and  failed  to  bring  about  the 
resumption  of  specie  payments.  Finally  in  1819  there  was  a 
panic  and  general  financial  collapse.  Banks  and  business  houses 
failed  and  there  was  general  distress.  This  panic  was  coincident 
with  the  one  in  England. 

In  1825  the  Erie  Canal,  which  furnished  cheap  transportation 
to  market  for  the  products  of  Western  New  York  and  the  terri- 
tory tributary  to  the  Great  Lakes  was  completed.  About  the  same 
time  the  government  built  a  military  road  from  Baltimore, 
through  Wheeling  and  Cincinnati  to  St.  Louis,  and  thus  the 
opening  of  routes  of  communication  with  the  far  west  diverted 
much  of  the  produce  of  those  territories  from  New  Orleans  to 
New  York.  Agriculture  improved,  and  the  products  of  the  soil 
increased  in  quantity  and  variety.  Saxony  sheep  of  the  best 
breeds  were  imported  for  the  improvement  of  the  quality  of 
American  wool.  Flax  and  hemp,  hitherto  chiefly  supplied  from 
Russia,  were  cultivated  more  extensively  in  order  to  supply  the 
demand  for  these  fibers  by  eastern  shipbuilders  for  caulking 
ships,  and  also  for  the  spinning  and  weaving  of  linen  cloth. 
The  cotton  industry  continued  to  increase  at  a  marvelous  rate. 
Home  ^^^  price  per  pound  fluctuating  with  a  downward 

Industries  tendency,  ■  but    the   gross    value    increased    enor- 

1 20-I  30  mously.    Massachusetts,  Rhode  Island,  New  York 

and  Pennsylvania  were  the  seats  of  the  cotton  industry,  the 
largest  mills  being  located  at  Lowell.  The  South  was  an  agri- 
cultural section.  Its  slave  labor  was  better  suited  to  farming 
than  to  factory  work,  and  there  was  a  scarcity  of  skilled  labor 
in  the  South.  For  these  reasons  the  cotton  mills  were  located 
in  the  North,  where  skilled  labor  could  be  had,  and  they  were 
situated  on  the  coast  or  on  navigable  rivers  within  easy  reach  of 


HOME    INDUSTRIES.  121 

the  sea  coast,  in  order  that  the  raw  cotton  could  be  advantage- 
ously brought  to  the  mills  from  the  plantations  of  the  South. 
Mining  was  another  industry  which  began  to  be  developed 
about  this  time  (1815-1830).  Rich  as  the  country  was  in  mineral 
wealth,  for  want  of  capital  little  had  been  done  prior  to  this  time 
to  develop  the  mines  of  iron,  coal,  lead  and  the  precious  metals, 
and  even  now  they  were  worked  in  a  most  inadequate  degree. 
The  introduction  of  steam  as  a  motive  power  on  steamboats 
and  for  propelling  machinery  in  the  factories,  quickened  the 
demand  for  coal,  while  the  iron  and  steel  industry  began  a 
development  which  has  since  outgrown  all  others  in  the  diversity 
and  importance  of  its  finished  product. 

In  order  to  maintain  and  encourage  manufacturing  enter- 
prises, the  United  States  early  adopted  the  policy  of  protective 
duties  on  imports — a  policy  which  has  been  a  cause  of  discord 
between  the  North  and  the  South.  The  Southern  states  were 
very  fertile  and  possessed  the  doubtful  advantage  of  slave  labor — 
a  class  of  labor  suited  best  to  agriculture.  As  a  consequence 
those  states,  restricted  to  agriculture,  were  opposed  to  protection, 
while  the  Northern  states,  being  devoted  largely  to  manufacture, 

sought  the  support  of  protection.  The  planters 
and  Slavery         ^^^^  dcsirous  of  getting  manufactured  goods  in 

the  cheapest  markets  in  exchange  for  the  produce 
of  their  plantations.  They  were  free  traders,  while  the  North 
was  in  favor  of  free  labor  and  opposed  to  slavery.  Slavery  and 
trade  protection  thus  became  the  bones  of  contention.  The 
first  tariff  law,  passed  in  1789,  imposed  a  duty  of  about  five  per 
cent.  In  1812,  to  meet  the  demands  of  war,  the  rate  of  duty  was 
increased  to  about  fifteen  per  cent.  A  new  law  was  passed  in 
1816  imposing  different  rates  of  duty  upon  different  classes  of 
products,  but  the  average  was  about  twenty-five  per  cent.  In 
1824  the  manufacturers  found  it  still  difficult  to  maintain  suc- 
cessful competition  against  English  products,  and  clamored  for 
further  protection.     The  English  had  brought  fresh  skill  and 


122  HISTORY    OF    COMMERCE. 

new  inventions  to  bear  upon  their  goods  and  were  selling  at  very 
small  profits.  Notwithstanding  the  vigorous  opposition  of  the 
planters  of  the  South  and  consumers  generally,  Congress  passed 
a  new  tariff  law,  raising  the  duties  to  thirty-three  and  one-third 
per  cent.  Again  in  1828  the  law  was  amended,  increasing  the 
duties  to  an  average  of  forty-five  per  cent.  The  South  was 
indignant,  since  it  was  not  a  sharer  in  the  benefits  of  the  tariff, 
but  on  the  contrary  suffered  in  consequence.  The  cotton,  rice 
and  tobacco  x)f  the  South  were  shipped  largely  to  Europe,  and 
in  European  markets  these  commodities  brought  no  higher 
prices  on  account  of  American  tariffs,  while  the  price  of  all 
manufactured  articles  which  the  agricultural  states  might  con- 
sume was  considerably  increased.  Carolina  went  so  far  as  to 
threaten  secession,  but  trouble  was  averted,  and  in  1832  the  law 
was  modified  by  taking  off  most  of  the  merely  revenue  duties, 
and  reducing  the  protective  duties.  In  1833  Henry  Clay's  Com- 
promise Tariff  Bill  was  passed,  by  which  a  gradual  reduction  in 
duties  was  provided  for,  down  to  a  uniform  level  of  twenty  per 
cent,  by  the  year  1842.  In  that  year,  however,  the  manufact- 
uring interests  in  Congress  violated  their  pledge  and  reimposed 
the  old  rates  of  duties.  Thus  the  struggle  over  tariff  and  slavery 
went  on,  the  latter  becoming  more  acute  until  merged  in  the 
great  Civil  War  of  1861. 

The  wise  navigation  laws  of  1792  provided  that  only  Ameri- 
can built  vessels  should  be  employed  in  American  commerce. 
Following  this  was  the  enlightened  foreign  policy  of  neutrality 
during  the  Napoleonic  wars,  by  which  our  shipping  was  unmo- 
lested, while  that  of  other  nations  suffered.  Then  the  "Tonnage 
Laws"  previously  alluded  to'  helped  to  develop  our  merchant 
marine.  During  the  war  of  1812  New  York  and  Baltimore 
ship-builders  became  famous  for  producing  the  swiftest  fleet  of 
privateers  called  "clipper  ships"  that  ever  spread  sail  on  the 
ocean,  scarcely  one  of  the  newly-built  being  captured  by  the 
enemy.     After  the  war  of  1812  New  York  and  Philadelphia 


MERCHANT   MARINE.  123 

merchants  established  sailing  packets  to  Liverpool  and  other 
foreign  ports.    Stephen  Girard  was  one  of  these  merchants.  From 
1815  to  1850  may  be  called  a  period  of  reciprocity 
Marine"'  ^^  shipping.    The  law  of  1815   equalized  the  ton- 

nage and  import  duties  on  all  ships  and  produce 
of  nations  which  were  willing  to  extend  the  same  privileges 
to  American  ships  and  cargoes,  and  to  all  other  nations  we 
offered  the  severe  terms,  that  "no  produce  should  be  imported 
into  the  United  States  except  in  vessels  of  the  United  States  or 
in  the  vessels  of  the  citizens  of  the  country  of  which  the  goods  are 
the  growth,  production  or  manufacture."  This  was  an  enact- 
ment of  the  English  Navigation  Laws.  Under  these  laws  our 
foreign  commerce  flourished  and  ship-building  became  a  pros- 
perous industry.  Our  coasting  trade  and  fisheries  have  always 
been  kept  exclusively  to  ourselves,  and  about  1830,  owing  to 
increased  production  of  cotton,  rice  and  tobacco  for  export  and 
also  for  the  factories  of  New  England,  our  coasting  trade  de- 
veloped extensively.  Another  great  increase  in  the  coasting  trade 
set  in  about  1846,  owing  to  the  settlement  of  California.  Our 
merchant  marine  reached  its  zenith  of  size  and  prosperity  in 
1857.  Seventy  per  cent,  of  our  foreign  trade  was  then  carried 
in  American  vessels.  About  1850  the  period  of  steam  and  steel 
began,  and  this  proved  a  period  of  decadence  for  our  merchant 
marine.  The  construction  of  iron  vessels  returned  to  the  British 
Isles.  The  English  could  build  these  vessels  cheaper  than  we, 
and  they  have  since  possessed  almost  a  monopoly  of  the  industry, 
although  there  are  now  indications  of  a  decided  change  in  this 
respect.  From  seventy  per  cent,  in  1857  the  proportion  of  our 
commerce  carried  in  American  vessels  has  steadily  declined,  until 
in  1881  to  1885  it  averaged  barely  twenty  per  cent.,  and  in  1900 
it  was  less  than  ten  per  cent.  Seven-tenths  of  our  total  export 
trade,  and  nearly  two-thirds  of  our  total  foreign  trade,  both 
export  and  import,  is  carried  in  British  vessels.  Let  us  hope 
that  this  condition  of  affairs  will  not  long  continue. 


124  HISTORY    OF    COMMERCE. 

Congress  in  1811  refused  to  renew  the  twenty  year  charter 
of  the  United  States  Bank  organized  by  Hamilton.  During  the 
war  which  followed,  the  financial  system  was  badly  disarranged. 
Specie  payment  had  been  suspended  and  the  country  was  filled 
with  paper  currency  circulating  at  15  to  30  per  cent,  below  its 
par  value.  To  remedy  this  evil  and  resume  specie  payment,  a 
second  United  States  Bank  was  organized  in  1816  with  a  capital 
of  $35,000,000,  power  to  establish  branches,  etc.  The  parent 
bank  was  in  Philadelphia,  and  twenty-five  branches  were  estab- 
The  Second  Hshcd  throughout  the  country.    President  Jackson 

United  states  was  hostilc  to  the  bank,  as  he  believed  it  had  been 
opposed  to  his  election.  Accordingly  in  1833,  on 
the  pretext  that  the  bank  was  unsafe,  he  ordered  the  Secretary 
of  the  Treasury  to  remove  the  deposits  of  public  funds  and  to 
place  them  in  state  banks.  This  was  almost  a  death-blow  to  the 
Bank.  It  was  obliged  to  call  in  its  loans  and  reduce  the  volume 
of  its  business  almost  to  that  of  an  ordinary  bank. 

During  the  decade  1825  to  1835,  the  country  had  been  very 
prosperous.  The  national  debt  had  been  steadily  reduced  since 
the  close  of  the  war,  and  in  1835  the  last  dollar  was  paid.  The 
public  lands  were  being  sold  in  the  west  at  a  rapid  rate,  and 
this  brought  a  stream  of  money  into  the  treasury.  The  receipts 
of  the  government  far  surpassed  its  expenditures.  Congress 
declined  to  reduce  the  tariff  for  fear  of  injuring  the  manufactur- 
ing interests  of  the  country,  and  instead  of  using  this  surplus 
revenue  for  internal  improvements,  which  the  strict  construc- 
tionists claimed  would  be  unconstitutional,  or  for  harbors  and 
fortifications  along  the  coast,  as  urged  by  Senator 
andSuTJius  Bcutou,  decided  that  the  amount  should  be  dis- 
tributed among  the  states  to  be  used  by  them  in 
public  works  as  they  chose.  The  surplus  amounted  on  January 
1,  1837,  to  $37,000,000.  Three  installments  were  paid,  but  be- 
fore the  fourth  could  be  made  ready,  the  great  financial  panic 
struck  the  country  and  left  the  treasury  bankrupt. 


PANIC    OF    1837.  125 

The  cause  of  the  panic  was  attributed  by  the  friends  of  the 
United  States  Bank  to  the  crippling  of  that  concern,  and  by 
the  manufacturers  to  the  reduction  in  the  tariff,  but  while  these 
may  have  been  factors,  the  most  potent  cause  was,  without  doubt, 
overspeculation.  For  ten  years  prior  to  the  panic  the  country 
had  been  upon  a  general  wave  of  prosperity.  Trade  was  active 
and  a  general  expansion  in  business  was  in  progress.  Merchan- 
dise of  all  kinds  was  in  demand  at  advancing  prices.  Cotton  was 
six  cents  a  pound  in  1830  and  twenty  cents  in  1837.  New  busi- 
ness enterprises  were  commenced  and  old  ones  enlarged.  Buying 
and  selling  of  western  land  became  a  mania.  Town  sites  were 
laid  out  in  the  western  prairies  and  lots  were  sold  at  inflated 

prices.  It  is  said  that  so  many  towns  were  laid  out 
The  Panic  of         -^  HHnois  that  there  was  little  land  left  for  farms. 

Banks  were  multiplied,  and  paper  money  printed 
to  meet  the  demand  for  capital  with  which  to  carry  on  the  busi- 
ness of  the  country,  irrespective  of  the  amount  of  specie  back  of 
it  all.  The  volume  of  paper  money  in  circulation  in  1837  ran 
up  to  one  hundred  and  forty-nine  millions,  while  the  specie  sup- 
porting it  was  less  than  forty  millions.  Speculators  were  buying 
up  public  lands  at  one  dollar  per  acre,  and  as  soon  as  the  gov- 
ernment land  agents  deposited  the  cash  in  the  banks,  the  specu- 
lators borrowed  it  and  bought  more  land.  Thus  the  cash  went 
its  rounds  and  property  changed  hands.  Finally  the  government 
issued  its  "specie  circular,"  requiring  that  payment  for  public 
lands  be  made  in  specie.  This  embarrassed  the  speculators  and 
began  the  feeling  of  distrust.  Banks  began  to  call  in  their  loans, 
and  depositors  began  to  withdraw  their  funds.  Cotton  fell  from 
twenty  cents  to  eight  cents,  and  other  products  proportionately. 
English  investors  began  to  try  to  withdraw  their  capital,  and 
then  suddenly  the  crash  came.  This  was  probably  the  worst 
panic  in  point  of  severity  the  country  has  ever  seen,  although 
the  volume  of  business  involved  was  far  less  that  those  of  later 
dates.    "Cheap  money/'  rashness  and  overspeculation,  and  wild 


126  HISTORY    OF    COMMERCE. 

financiering  by  the  treasury  department  of  the  government,  were 
the  combined  causes  which  led  to  this  disastrous  result. 

The  application  of  steam  power  to  transportation  brought 
about  an  economic  revolution  throughout  the  world,  but  nowhere 
was  this  more  marked  or  beneficial  than  in  the  United  States. 
The  canal  boats  and  crude  steamboats  which  came  into  use 
during  the  two  decades  following  the  war  of  1812,  were  super- 
seded by  the  river  packet  and  railroad  train  after  1830.  By 
means  of  improved  facilities  for  transportation,  the  markets  were 
brought  nearer  to  the  farmer,  so  that  his  cotton,  corn  or  cattle 
were  easily  delivered  and  converted  into  cash,  and  in  return  he 
was  supplied  with  manufactured  goods  at  far  lower  prices  than 
formerly,  owing  to  lower  carrying  charges.     Travel  also  began 

to  become  something  of  a  pleasure  instead  of  a 
Railroads  scrious  task,  as  it  had  been  in  the  days  of  the 

stage  coach,  and  the  movement  of  the  people  broke 
down  provincialism,  improved  the  general  intelligence  and  led 
to  the  social  and  industrial  upbuilding  and  advancement.  In 
1830  there  were  but  23  miles  of  railroad  in  the  United  States, 
but  by  1840  the  mileage  had  increased  to  2,775.  In  a  journey  of 
two  hundred  or  three  hundred  miles  a  passenger  was  liable  to 
be  compelled  to  change  cars  several  times,  and  the  accommoda- 
tions were  far  from  luxurious,  but  they  represented  a  step  in  the 
onward  march  of  civilization.  In  1850  the  mileage  of  the  rail- 
roads had  increased  to  nearly  9,000  and  in  1860  to  nearly  30,000. 
Another  valuable  invention,  closely  connected  with  the  rail- 
roads, came  out  about  this  time  and  added  vastly  to  the  facili- 
ties of  commerce,  the  telegraph  invented  by  Morse  in  1844. 
Congress  in  that  year  made  an  appropriation  of  thirty  thousand 
dollars  for  the  purpose  of  constructing  a  wire  from  Washington 
to  Baltimore,  in  order  to  practically  test  the  invention.  The 
National  Whig  Convention  was  holding  its  session  in  Baltimore, 
and  over  this  wire  came  the  news  of  the  nomination  of  Henry 
Clay  for  the  Presidency,    The  construction  of  telegraph  lines 


TELEGRAPHS.  187 

then  proceeded  with  great  rapidity,  especially  in  the  Eastern 
states.    In  1856  the  various  lines  were  combined  under  the  cor- 
porate name  of  the    Western    Union    Telegraph 
Telegraphs  Company.    The  telegraph  not  only  proved  to  be 

a  wonderful  addition  to  the  facilities  for  transact- 
ing the  business  of  the  country,  by  affording  quick  communica- 
tion, but  also  made  the  safe  and  rapid  operation  of  the  rail- 
roads possible,  thus  accelerating  the  transportation  of  goods  and 
people.  In  1858  the  first  telegraph  cable  was  successfully  laid 
upon  the  bed  of  the  ocean,  and  thus  rapid  communication  be- 
tween the  old  and  the  new  worlds  became  possible. 

In  1845  Texas  was  admitted  into  the  Union,  and  thereby 
was  added  376,163  square  miles  to  our  broad  acres,  a  large 
part  of  which  is  rich  prairie,  well  adapted  to  grazing  or  tillage. 
The  vast  herds  of  cattle  maintained  upon  these  ranges  have 
furnished  the  country  with  a  considerable  portion  of  its  supply 
of  meat  and  hides.  A  dispute  with  the  Mexican  government 
over  the  boundary  of  Texas  furnished  a  pretext  for  war  with 
that  country,  the  real  object  of  which  was  the  acquisition  of  the 
vast  sunny  land  stretching  from  the  Rocky  Mountains  away  ta 
the  Pacific.  The  war  was  a  series  of  victories  for  the  United 
States,  and  Mexico,  poor,  misgoverned  and  distracted  by  numer^ 
ous  revolutions,  was  overpowered,  and  compelled  to  cede  to  the 
United  States  the  territory  which  we  coveted.  Americans  can 
never  take  pride  in  the  story  of  this  war,  which 
ce^sior*^*"  had  for  its  real  object  the  conquest  of  a  peaceable 
though  weaker  neighbor's  territory.  The  Mexi- 
cans were  forced  to  make  what  terms  they  could.  They  accepted 
the  Rio  Grande  as  their  border,  and  surrendered  all  land  north 
of  it,  embracing  New  Mexico  and  California,  extending  north- 
ward to  the  border  of  Oregon.  The  United  States  assumed 
the  unpaid  claims  of  American  citizens,  amounting  to  $2,500,- 
000,  and  paid  $15,000,000  for  the  territory.  But  like  all  ill- 
gotten  gains,  this  territory  led  to  difficulty  at  once,  and  a  severe 


128  HISTORY    OF    COMMERCE. 

dispute  arose  over  the  slavery  question,  which  culminated  a  few 
years  later  in  civil  war.  In  1853  an  additional  tract  of  44,064 
square  miles  of  land  was  purchased  from  Mexico,  called  the 
Gadsden  Purchase. 

At  the  time  of  the  Mexican  Cession  the  presence  of  gold  was 
not  known,  but  by  accident  the  discovery  was  made  in  the  follow- 
ing year,  and  as  soon  as  the  news  spread  throughout  the  middle 
and  eastern  states,  a  great  rush  set  in  for  the  Pacific  coast,  both 
overland  and  by  water  via  the  Isthmus  of  Panama.  The  popula- 
tion of  California  in  1847  was  15,000,  and  the  output  of  gold  is 
estimated  to  have  been  about  $890,000.  This  amount  was  in- 
creased to  $10,000,000  in  1848,  to  $40,000,000  in  1849,  to  $50,- 
000,000  in  1850,  to  $55,000,000  in  1851  and  to  $65,000,000 
in  1853,  when  the  population  had  increased  to  over  100,000  of  a 
motley  mixture  of  nearly  all  races  and  tongues,  bent  upon  the 
Discovery  of  ^^^  missiou,  that  of  getting  rich  quickly.  The 
Gold  in  discovery  of  gold  on  the  Pacific  coast  gave  a  new 

impulse  to  the  mining  industries  of  the  country, 
and  besides  developed  the  trade  of  that  portion  of  the  country 
very  rapidly.  The  harbor  of  San  Francisco  was  filled  with 
shipping,  and  thrifty  towns  and  cities  sprang  up  where  only 
straggling  villages  existed  before. 

Following  the  example  of  England  in  the  erection  of  its  great 
crystal  palace  and  exposition  at  Hyde  Park,  London,  in  1851, 
the  first  international  exhibition  in  this  country  was  held  in 
New  York  in  1853.  It  was  fitting  that  this  new  and  thriving 
nation,  then  a  little  more  than  a  half  century  old,  should  measure 
its  progress  in  the  arts  and  sciences  by  a  comparison  with  the 
best  the  world  produced.  Never  before  had  such  a  display 
of  the  products  of  the  hand  and  brain  of  man  been  attempted 
in  the  Western  Hemisphere.  In  the  departments  of  machinery 
and  tools,  agricultural  implements,  hardware,  mineralogy  and 
mining,  as  well  as  the  fine  arts,  America  made  a  very  extensive 
and  creditable  display,  rivaling  in  many  respects  the  productions 


EXPOSITION    OF    1853.  129 

of  Europe.  Not  only  our  choicest  products  in  almost  infinite 
variety  were  presented  for  exhibition,  but  from  other  countries 
The  Great  and  cHmcs,  from  distant  parts  of  the  globe,  came 

New^York'^  cxhlbits  represented  by  countless  contributors. 
1853  England  and  France  made    superb    offerings    of 

their  works  of  art  and  manufacture,  and  the  Sultan  of  Turkey 
fitted  out  a  steam  frigate  especially  to  convey  the  splendid  fabrics 
of  the  Ottoman  empire,  richly  carved  cabinets,  rugs  and  carpets 
of  wonderful  elaboration  and  beauty.  This  exposition  did  much 
to  stimulate  the  spirit  of  invention  and  discovery,  and  improve 
processes  of  manufacture  throughout  the- country,  and  was  the 
beginning,  the  formal  opening  as  it  were,  of  what  has  proven 
to  be  a  half  century  of  the  greatest  achievements  in  mechanic  and 
industrial  arts  the  world  has  ever  witnessed. 

During  the  period  of  1840  to  1855  there  had  been  estab- 
lished throughout  the  country  a  system  of  banking,  under  state 
laws,  called  "free  banking,"  by  which  banks  were  allowed  to 
issue  circulating  notes  based  upon  little  or  no  security,  and 
subject  to  very  loose  and  inadequate  restrictions.  The  chief 
object  in  the  scheme  seemed,  on  the  part  of  the  banks,  to  be 
to  issue  notes,  get  them  into  the  hands  of  the  people  for  value, 
then  take  measures  to  prevent  the  note  holders  from  calling  on 
state  Banks  ^^®  banks  for  specie.  Various  subterfuges  were 
and  the  Panic  rcsortcd  to  for  this  purposc.  In  one  instance  in 
°^  ^^^^  Illinois,  where  an  effort  was  made  to  present  the 

notes  at  the  bank's  counter  for  redemption,  no  counter  was 
found,  but  merely  a  hired  room  in  a  remote  and  obscure  neigh- 
borhood. This  unreliable  system  of  banking  was  permitted  by 
statutory  enactments  in  sixteen  states,  and  under  it  "mushroom 
banks"  were  started  in  large  numbers  all  over  the  west.  Paper 
money  was  plentiful  and  counterfeits  floated  in  large  quantities. 
These  conditions  induced  speculation  of  all  descriptions.  Cities 
were  laid  out,  railroads  projected,  and  debts  piled  up  at  high 
rates  of  interest,  all  based  upon  the  prospects  of  large  returns  in 


130  HISTORY    OF    COMMERCE. 

the  near  future.  A  panic  was  inevitable,  and  in  the  autumn  of 
1857  it  came,  carrying  down  in  the  ruin  thousands  of  reputable 
firms,  and  entailing  untold  misery  as  usual  upon  innocent 
widows  and  orphans.  Nevertheless  many  of  the  banks  which 
had  failed  got  on  their  feet  again  within  the  next  three  years,  so 
that  when  the  war  began,  in  1861,  there  were  112  of  these  so- 
called  "solvent  banks"  doing  business.  This  "wild  cat"  money 
continued  to  circulate  until  it  was  driven  out  of  existence  in 
1863  by  the  10  per  cent,  tax  imposed  under  the  National  Bank- 
ing Act. 

The  period  which  we  are  just  now  considering — the  decade 
preceding  the  Civil  War — was  notable  for  the  increased  number 
of  its  inventions  and  improvements  in  the  processes  of  manufact- 
ure.   In  1857  there  were  issued  2,000  patents,  438  of  which  were 

for  agricultural  implements  and  processes,  consist- 
iSso^-is'^'^^  ing  chiefly  of  improvements  in  cotton  gins,  rice 

cleaners,  reapers,  mowers  and  plows.  The  next 
year  there  were  issued  3,710  patents,  of  which  153  were  for  im- 
provements in  reaping  and  mowing  machines,  42  for  improve- 
ments in  cotton  gins  and  presses,  164  for  improvements  in  steam 
engines,  and  198  for  improvements  in  railroads  and  railroad 
ears.  Some  of  these  inventions  have  proven  of  the  greatest 
importance  and  economic  value  to  mankind,  such  as  those  relat- 
ing to  the  perfection  of  the  sewing  machine,  printing  presses,  and 
the  improvements  in  the  manufacture  of  rubber  goods,  carpets  and 
wall  paper.  Prior  to  this  period  ready-made  clothing  and  boots 
and  shoes  were  practically  unknown,  these  articles  being  made  in 
small  shops,  employing  a  few  workingmen,  but  now  with  the 
advent  of  machinery  for  cutting,  sewing,  etc.,  they  began  to 
be  turned  out  by  factories  at  greatly  reduced  cost  to  the 
consumer. 

With  the  minds  and  energies  of  the  people  thus  absorbedf 
in  their  abounding  material  prosperity,  new  inventions  and 
improved  processes  constantly  appearing  to  render  human  labor 


CIVIL    WAR.  181 

more  effective,  and  matter  yielding  to  the  brain  and  energy 
of  progressive  man,  we  approach  the  great  Civil  War  (1861-1865), 
which  marked  the  opening  of  a  new  era  in  the 
civii°War  Commercial  as  well  as  political  history  of  our  coun- 

try. Prior  to  this  time  the  North  had  been  the 
manufacturing  section  and  the  South  was  devoted  almost  exclu- 
sively to  agriculture.  Owing  to  their  diverse  interests  these  two 
sections  had  been  in  almost  constant  contention  for  the  past 
fifty  years  over  the  tariff  question,  but  gradually  there  had 
loomed  up  another  and  even  more  serious  cause  of  disagreement, 
the  slavery  question.  The  two  conflicting  systems  of  labor,  free 
in  the  North  and  slave  in  the  South,  would  not  mix.  Emigration 
would  not  put  itself  in  competition  with  slave  labor,  and  hence 
passed  in  parallel  lines  westward  across  the  North.  Now  came 
the  Civil  War,  which  cost  600,000  lives  and  an  incalculable 
amount  of  property,  and  resulted  in  an  industrial  revolution  of 
the  labor  system  of  the  South,  forcing  that  section  to  adopt  tha 
system  existing  elsewhere,  and  therefrom  dates  the  mechanical 
development  of  the  South. 


CHAPTEK  XIII. 

COMMERCE  OF  THE  UNITED  STATES— Continued. 

GROWTH   OF   INDUSTRIES;   INVENTIONS   AND    DISCOVERIES; 
FOREIGN  TRADE. 

The  Southern  states  were  the  scene  of  the  conflict,  and  re- 
sounded with  the  tread  of  armies.  As  a  consequence,  the  pros- 
perity of  the  South  was  arrested  during  the  war  and  its  fields 
and  towns  destroyed  or  damaged.  The  North  held  the  mechani- 
cal industries  of  the  country,  and  under  the  stimulus  of  war  these 
industries  were  expanded  to  their  fullest  capacity.  Business  of 
all  kinds  in  the  North  prospered,  prices  were  high,  and  the  armies 
in  the  field  were  sustained  and  paid  by  a  thrifty  agricultural  and 
manufacturing  domain  behind  them.     The  agricultural  South 

could  not  compete  with  the  manufacturing  North. 
After  the  War      Prior  to  the  war,  the  diversified  resources  of  the 

South  were  not  appreciated — scarcely  noticed. 
Her  rich  deposits  of  iron  and  other  ores,  the  coal  to  work  the 
ores,  her  timber  and  stone  and  her  water  power  were  almost 
untouched.  It  was  actually  contended  that  manufacturing  could 
not  be  profitably  carried  on  in  the  South  on  account  of  climatic 
influences.  But  the  war  not  only  revolutionized  the  system  of 
labor  in  the  South,  but  thereafter  began  the  mechanical  develop- 
ment of  the  Southern  states.  With  the  return  of  peace,  attention 
was  turned  to  the  elements  which  are  essential  to  industrial 
development,  and  there  has  since  grown  up  in  that  section  an 
extensive  factory  system.  The  South  found  that  besides  the 
capacity  to  raise  cotton  and  tobacco  for  domestic  and  foreign 
consumption,  great  sources  of  wealth  were  hidden  beneath  the 
surface  in  the  mineral  deposits  of  the  country.  Thus  near 
Birmingham,  Alabama,  rich  iron  mines  were  discovered,  with 

133 


COTTON    INDUSTRY.  133 

coke-making  coal  and  limestone  needed  for  smelting  and  mak- 
ing steel  near  by,  and  thus  the  cost  of  making  did  not  involve 
the  transportation  of  either  of  these  products.  As  a  result, 
Birmingham  has  now  become  an  important  manufacturing 
center. 

For  a  time  directly  after  the  war,  and  as  its  natural  conse- 
quence, agriculture  and  all  other  industries  in  the  South  were 
depressed,  and  society  was  more  or  less  discouraged,  disorganized 
and  in  a  state  of  doubt.  Fears  were  entertained  that  their  great 
staple,  cotton,  would  not  be  raised  so  plentifully  under  free 
as  slave  labor,  but  the  contrary  was  proven  to  be  the  case.  The 
Growth  of  the  largest  cottou  crop  prior  to  the  war  was  in  1860, 
Cotton  and  and  amounted  to  4,669,770  balcs.    This  yield  was 

other  Industries  ^^^  reached  again  until  1871,  and  since  1876  there 
has  never  been  a  year  when  the  crop  did  not  exceed  that  of  1860, 
while  in  1901  it  reached  the  enormous  total  of  10,383,422  bales. 
While  formerly  the  South  exported  nearly  all  of  her  raw  cotton 
or  sent  it  to  the  mills  of  New  England,  she  now  manufactures 
a  very  large  part  of  it,  1,583,000  bales  having  been  woven  by 
southern  cotton  mills  during  the  year  1901  as  against  1,964,000 
bales  manufactured  in  the  North.  The  opening  up  of  coal  mines 
in  the  South  for  fuel  supply,  and  the  movement  of  northern 
capital  and  skilled  labor  southward,  may  be  ascribed  as  the 
reasons  for  the  increased  manufacture  of  cotton  in  the  South. 

The  growth  and  development  of  the  cotton  industry  in  the 
South  during  the  past  forty  years  may  be  almost  taken  as  an 
example  of  the  general  development  of  the  country  in  all  lines 
of  activity.  New  industries  have  been  constantly  appearing  and 
old  ones  enlarging.  New  processes  and  improved  machinery 
have  been  constantly  reducing  the  cost  and  utilizing  products 
which  formerly  were  considered  worthless.  Many  industries 
have  passed  from  the  household  or  small  shop  to  the  large  fac- 
tory, where  steam  power  or  electricity  have  supplemented  man 
power,  and  thus  cheapened  production.    The  wonderful  devel- 


134  HISTORY   OF   COMMERCE. 

opment  of  the  natural  resources  of  the  country,  the  ambition 
manifested  by  the  people  in  all  lines  to  supply  home  demand, 
ever  increasing  on  account  of  a  large  immigation,  and  to  have 
a  share  in  foreign  markets,  have  tended  to  stimulate  all  lines 
of  manufacturing  during  this  period.  Added  to  these,  the  pro- 
tective tariff  has  given  an  additionl  encouragement  to  a  large  list 
of  industries,  and  assisted  in  the  general  commercial  advance- 
ment. 

In  no  class  of  industries  has  there  been  a  greater  advance- 
ment in  the  methods  of  manufacture  from  the  raw  to  the  finished 
product  during  the  past  forty  years  than  in  that  of  iron  and 
steel,  and  in  none  has  there  been  produced  a  greater  diversity  of 
finished  products.  The  processes  through  which  the  metal 
passes,  from  the  ore  in  its  natural  form  up  to  the  manufacture 
of  almost  an  unlimited  variety  of  articles  for  man's 
steeUndustry  Convenience,  ranging  from  the  spiral  watch  spring 
up  to  the  mammoth  beam  of  structural  steel,  is 
a  triumph  of  inventive  genius.  One  of  the  principal  causes 
of  the  enormous  development  of  the  steel  and  iron  industry  has 
been  the  demand  for  railroad  track,  incident  to  the  expansion  of 
our  railroad  systems.  Iron  rails  were  formerly  used,  but  steel 
has  almost  entirely  superseded  them.  The  substitution  of  coke 
for  coal  and  charcoal  in  the  production  of  pig  iron,  and  the 
cheapening  of  the  process  of  the  manufacture  of  steel  caused  by 
the  introduction  of  the  Bessemer  and  Siemens-Martin  or  open 
hearth  system,  have  tended  to  facilitate  the  use  of  steel  in  the 
construction  of  buildings  and  otherwise,  while  the  invention  of 
new  machinery  usually  necessitates  the  use  of  steel  in  its  con- 
struction. 

In  1859  petroleum  was  discovered  in  Pennsylvania,  and  the 
supply  from  that  region  and  from  Ohio  has  thus  far  proven 
inexhaustible.  A  method  of  refining  the  oil  was  soon  after 
devised,  and  there  are  now  over  two  hundred  products  of  this 
mineral  oil  used  for  illuminating,  lubricating,  etc.,  the  whole 


PACIFIC   RAILROAD.  185 

constituting  one  of  our  most  important  industries.  A  great 
demand  for  this  oil  in  its  various  forms  has  made  it  an  important 
article  of  domestic  and  foreign  commerce.  Thou- 
Petroieum°^  sauds  of  milcs  of  pipcs  have  heen  laid  from 
wells  to  the  seaboard  and  the  Great  Lakes, 
and  extensive  refineries  have  been  established  in  New  York, 
Philadelphia,  Cleveland,  Buffalo  and  Chicago.  Large  discov- 
eries of  fuel  oil  were  made  in  Texas  in  1901,  affording  a  valuable 
source  of  supply  to  western  consumers,  and  proving  especially 
fortunate  for  use  upon  the  great  prairies  of  the  west  where  wood 
and  coal  are  scarce. 

In  1867  the  United  States  again  enlarged  its  territory,  by  the 
purchase  of  Alaska  from  the  Russian  government  for  $7,200,000. 
This  has  proven  to  be,  like  other  extensions  of  our  boundaries, 
a  profitable  investment,  the  seal  fisheries  alone  being  worth 
Alaskan  much  more  than  the  price  paid  for  the  entire 

Purchase  couutry.    Alaska  is  1,200  miles  long  from  north  to 

^  south,  and  2,100  miles  wide  from  east  to  west.    It 

is  the  chief  source  of  supply  of  salmon  fish,  which  abounds  plen- 
tifully, and  the  industry  of  fish  canning  here  is  the  largest  in  the 
world.  Valuable  gold  mines  have  been  discovered  and  par- 
tially developed,  and  the  country  is  no  doubt  rich  in  other 
minerals.  The  extensive  forests  will  also  prove  a  source  of 
wealth  to  the  nation. 

One  of  the  most  important  achievements  of  the  decade  fol- 
lowing the  Civil  War  was  the  completion  in  1869  of  the  great 
transcontinental  line  of  the  Pacific  Railroad.  The  astonishing 
development  of  the  Pacific  coast,  and  the  travel  and  traffic  that 
inevitably  followed,  created  an  imperative  need  for  a  cheaper  and 
easier  method  of  transportation  to  and  from  the 
Railroad  caast.     This  great  achievement  in  railroad  build- 

ing, difficult  as  it  was,  has  since  been  followed  by 
other  routes  across  the  continent.  The  cheapening  of  transporta- 
tion, together  with  improved  facilities  for  carrying  perishable 


136  HISTORY    OF    COMMERCE. 

freight,  has  enabled  California  to  market  her  fruit,  one  of  her 
great  products,  throughout  the  East.  The  Eastern  and  Middle 
states  have  been  brought  next  door  to  the  West,  and  prices  of  all 
commodities  have  tended  to  become  lower  to  the  consumers.  Vast 
areas  of  unproductive  and  apparently  barren  land  in  the  West  have 
become  productive  and  valuable  because  they  are  brought  within 
reach  of  a  market. 

At  the  commencement  of  the  Civil  War  our  foreign  trade  foot- 
ed up  about  $700,000,000,  the  imports  and  exports  being  nearly 
equal  and  the  balance  being  about  $20,000,000  against  us.  Our 
principal  export  at  that  time  was  cotton.  The  war  blockades 
seriously  interfered  with  foreign  commerce,  and  especially  re- 
duced our  exports,  so  that  in  1865  these  amounted  to  only 
about  $166,000,000,  almost  wholly  from  the  Northern  states. 
The  great  staple,  cotton,  had  been  neglected  or  destroyed  and 
very  little  raised.  Industries  in  the  South  were  prostrated,  and 
Foreign  homc  Consumption  demanded  nearly  all  the  North 

Commerce  after  produccd.  But  the  foreign  commerce  quickly 
*^^    ^^  regained  its  activity,  and   continued  to   increase 

until  arrested  in  a  measure  by  the  panic  of  1873,  the  imports, 
however,  considerably  exceeding  in  value  the  exports.  The 
principal  industries  of  the  country  at  that  time  were  the  tex- 
tiles, clothing,  lumber,  iron  and  steel,  leather,  boots  and  shoes, 
flour  and  meal,  sugar,  paper,  printing  and  publishing,  farm 
implements,  carriages  and  liquors,  malt  and  fermented.  The 
principal  exports  consisted  of  the  great  natural  products,  cotton, 
petroleum,  tobacco,  wheat,  lumber  and  iron,  for  the  United  States 
had  not  yet  arrived  at  the  point  where  its  manufactures  could 
compete  with  those  of  Europe.  The  depression  which  followed 
the  panic  of  1873  caused  a  falling  off  in  our  foreign  trade,  but  after 
1875  trade  revived,  and  for  nearly  ten  years  showed  a  steady  in- 
crease. The  exports  now  began  to  exceed  the  imports,  and 
with  slight  exception  have  continued  in  that  relation  until  the 
present  time.     Since  1896   our  imports  have   increased   com- 


FINANCE.  137 

paratively  little,*  while  our  exports  have  enormously  extended, 
leaving  a  balance  of  trade  in  our  favor  of  nearly  $700,000,000. 
The  United  States  is  now  a  vast  exporter  of  meat  and  other 
food  products,  while  its  manufactures  are  constantly  finding  a 
wider  market.  The  skill  and  ingenuity  of  American  workmen, 
with  the  latest  and  best  types  of  machinery,  enable  the  United 
States  to  manufacture  goods  cheaper  than  Europe,  while  paying 
American  workmen  larger  wages  than  are  paid  in  the  old  world. 

In  1861  the  banks  throughout  the  country  suspended  specie 
payment.  The  National  Treasury  was  empty,  and  to  carry  on 
the  war  the  government  resorted  to  an  issue  of  paper  money, 
called  "greenbacks."  The  volume  of  this  currency  ran  up  to 
$450,000,000,  and,  as  was  inevitable,  depreciated  in  value,  thereby 
causing  a  rise  in  prices  of  commodities.  Two  years  later  (1863) 
the  National  Banks  came  into  existence,  with  authority  to  issue 
paper  money  based  on  their  deposit  of  government  bonds.  Thus 
the  country  went  entirely  upon  a  basis  of  irredeemable  paper 
Resumption  Hiouey.  After  the  war  closed,  it  was  the  desire  of 
of  Specie  the  government  to  get  back  towards  a  specie  basis. 

Payment  ^^^  ^^  ^^^^t  end  proposcd  to  gradually  pay  off  and 

retire  the  greenbacks.  This  was  done  until  the  volume  had  been 
reduced  to  $356,000,000  in  1868. 

There  was  a  general  outcry  against  a  contraction  of  the 
currency.  Speculation  throughout  the  country  was  active 
and  business  was  constantly  expanding.  Corporations,  indi- 
viduals, cities  and  states  were  active  in  the  promotion  of  their 
various  enterprises  and  works.  An  unprecedented  mileage  of 
railways  was  constructed,  and  a  corresponding  bonded  indebted- 
ness floated.  Thus  the  condition  of  the  country  was  unstable. 
Our  foreign  commerce  from  the  year  1872  had  been  very  un- 
satisfactory, the  balance  of  trade  setting  heavily  against  us,  and 
foreign  investors  had  called  in  some  of  their  loans.     The  crash 


•Our  total  imports  in  1901  were  $823,172,165  and  total  exports  amounted 
to  $1,487,764,991. 


138  HISTORY    OF    COMMERCE. 

came  like  a  clap  of  thunder  out  of  a  clear  sky  when  the  firm 
of  Jay  Cooke  &  Co.  failed  in  New  York.  This  was  the  begin- 
ning of  a  general  break  in  public  confidence,  and 
Panic  of  1873  -  numerous  failures  of  banks  and  business  houses 
.  .:-  all  over  the  country  followed.     Credit    in    busi- 

ness was  refused,  and  debtors  everywhere  were  pressed  for  pay- 
ment. There  was  a  general  run  upon  savings  banks,  many  of 
which  failed,  disclosing  shocking  irregularities  in  management. 
The  prices  of  agricultural  products  declined,  and  manufactured 
goods  were  a  drug  on  the  market.  Factories  closed  or  ran  on 
short  time,  and  thus  the  months  drew  on  until  after  nearly  two 
years  business  began  to  revive  again.  Severe  as  the  lesson  had 
been  it  taught  the  people  the  necessity  for  a  stable  currency, 
and  resulted  in  steps  being  taken  to  reach  the  resumption  of 
specie  payment,  which  was  accomplished  in  January  1,  1879. 

About  1876  there  was  a  great  advance  in  the  production  of 
breadstuffs  in  the  United  States.  The  vast  wheat  fields  of 
Dakota  were  opened  up  to  cultivation,  and  with  improved  farm 
machinery  and  facilities  for  handling  the  immense  volume  of 
grain  there  produced,  grinding  it  into  flour,  or  exporting  it  in 
bulk  by  waterways  to  European  ports,  an  immense  industry  grew 
up  and  greatly  added  to  the  volume  of  our  foreign  trade.  The 
United  States  became  at  once  the  greatest  exporter  of  wheat 
and  breadstuffs  in  the  world,  selling  about  one- 
fhfNorthwist  ^alf  its  crop  to  foreign  countries.  The  method  of 
manufacturing  flour  was  revolutionized  and  cheap- 
ened about  this  time  by  new  milling  processes,  and  with  low 
rates  for  shipment  by  rail  and  water  routes  to  the  seaboard 
through  the  Great  Lakes  and  Erie  Canal  to  New  York  or  the 
-St.  Lawrence  River  to  Montreal,  where  it  was  loaded  into 
ocean  steamers,  we  were  able  to  supply  Europe  with  breadstuffs 
cheaper  than  from  any  other  source.  In  1867  the  United  States 
exported  a  little  over  eight  per  cent,  of  its  wheat  product,  but 
in   1880,  with  the  increased  production  and  foreign  market 


THE    McKINLEY   BILL.  139 

opened  up,  this  percentage  had  risen  to  more  than  forty  per  cent., 
and  now  Great  Britain  buys  four-sevenths  of  all  the  flour  the 
United  States  has  to  sell. 

The  McKinley  bill  which  became  a  law  in  1890  enlarged  the 
free  list,  but  advanced  the  duty  upon  many  manufactured  arti- 
cles. The  sugar  consumed  in  the  United  States  in  1890 
amounted  to  nearly  1,500,000  tons,  of  which  only  250,000  tons 
were  domestic  product.  Thus  the  protective  duty  on  this  article, 
while  benefiting  the  Louisiana  planters,  served  to  raise  the  price 
on  all  sugar  consumed  throughout  the  country,  and  had  little 
effect  in  increasing  the  volume  of  the  domestic  output,  owing 
to  the  fact  that  the  area  of  sugar  land  in  the  South  was  limited. 
On  the  other  hand  to  remove  the  duty  entirely  would  destroy 
the  sugar  planters  of  the  South,  who  would  be 
and  Reciprocity  utterly  unablc  to  compctc  against  the  sugar  grow- 
ers of  Cuba,  owing  to  the  fact  that  sugar  can  be 
produced  much  cheaper  in  Cuba  than  in  Louisiana.  The  Cuban 
grower  does  not  replant  his  cane  oftener  than  once  in  eight 
or  ten  years,  while  the  Louisiana  planter  must  replant  every 
second  year.  The  Cuban  grower  also  has  the  advantage  of  a 
more  favorable  climate  and  a  longer  grinding  season,  with  no 
damage  from  frosts.  Therefore,  to  protect  the  Louisiana  sugar 
grower  and  the  public,  the  McKinley  Act  put  sugar  on  the 
free  list,  and  paid  a  bounty  to  domestic  sugar  producers.  At  the 
same  time  a  discriminating  duty  of  one-tenth  of  a  cent  per 
pound  was  placed  upon  sugar  imported  from  countries  which 
paid  a  bounty  upon  sugar  exportation. 

But  the  most  important  and  interesting  feature  of  this  tariff 
legislation  was  the  reciprocity  feature,  due  to  the  far-seeing 
statesmanship  of  Secretary  of  State  James  G.  Blaine.*  His 
foreign  policy  looked  to  a  trade  federation  of  the  countries  of 


•Thomas  Jefferson  was  the  originator  of  the  reciprocity  idea,  and  in  a 
report  to  Congress  in  1793  recommended  reciprocity  as  the  true  method  of 
meeting  the  problem  of  our  foreign  commerce. 


140  HISTORY    OF    COMMERCE. 

the  Western  Hemisphere.    He  elaborated  the  Bureau  of  Ameri- 
can Eepublics,  and  through  his  efforts,  under  the  administration 

of  President  Harrison,  a  Pan-American  Congress 
Reciprocity  was   held   in   Washington   presided   over   by  Mr. 

Blaine.  Eeciprocity  treaties  were  concluded  with 
several  countries,  considerably  extending  our  trade.  Those  with 
Germany,  France,  Belgium  and  Italy  resulted  in  relieving  Ameri- 
can pork  from  the  embargo  placed  upon  it  in  those  countries. 
Under  the  policy  of  reciprocity  our  foreign  commerce  increased 
rapidly.  Thus  in  1891  we  sent  to  Cuba  approximately  115,000 
barrels  of  flour;  in  1892,  366,000  barrels;  in  1893,  610,000  bar- 
rels; in  1894,  662,000  barrels.  After  the  repeal  of  the  act,  we  sent 
Cuba  in  1895,  380,000  barrels  of  flour;  in  1896,  177,000  barrels; 
and  in  1898,  130,000  barrels. 

Nothing  has  contributed  to  the  commercial  growth  and 
development  of  the  United  States  more  than  its  railroad  system, 
which  now  reaches,  with  its  multitudinous  branches,  nearly  every 
village  in  the  eastern  half  of  the  republic,  and  all  of  the  im- 
portant towns  in  the  western  portion,  while  the  trans-continental 
lines  provide  great  highways  of  travel  and  transportation  from 
ocean  to  ocean.  The  growth  of  our  railway  systems,  from  their 
unpropitious  beginning  in  1827  to  their  present  gigantic  propor- 
tions, embracing  a  mileage  of  nearly  200,000  miles,  is  one  of  the 

most  animated  chapters  in  our  national  history.  The 
Railroads  United  States  has  a  far  greater  mileage  of  railways 

than  any  other  country — more  than  all  Europe,  and 
nearly  one-half  that  of  the  entire  world.  About  1,300,000 
freight  and  26,000  passenger  cars  run  upon  these  tracks,  and 
the  net  earnings  foot  up  nearly  $400,000,000  per  annum.  But 
the  railway  systems  of  the  United  States  have  not  only  extended 
in  mileage  but  in  even  a  greater  degree  in  their  capacity  to  move 
freight  and  passengers.  The  roadbeds  are  more  substantial  than 
formerly,  the  rails  larger,  heavier,  and  of  steel  instead  of  iron; 
the  roads  have   fewer   curves,   lower   gradients,  steel  bridges, 


LAND    TENURES.  141 

double  tracks,  larger  cars  and  more  powerful  engines,  so  that 
trains  haul  heavier  loads  and  make  better  time.*  Numerous 
safety  appliances,  signals,  improved  air  brakes  and  other  devices 
now  contribute  to  the  safety  of  railroad  travel,  and  reduce  the 
loss  by  accidents.  Withal  there  has  been  a  general  cheapening  of 
carrying  cargoes,  the  average  cost  of  carrying  a  ton  of  freight  one 
mile  now  being  less  than  one  cent,  whereas  in  1865  the  cost  was 
upwards  of  three  cents.  With  lower  freight  rates  and  quicker 
service,  together  with  refrigerator  cars  and  special  facilities  for 
carrying  live  stock  and  perishable  articles  like  meats  and  fruits, 
the  market  for  these  has  widened,  their  price  has  cheapened  and 
become  more  uniform,  and  the  cost  of  the  necessaries  of  life  to 
the  consumer  has  constantly  tended  to  become  lower. 

Allusion  was  made  to  the  division  of  the  landed  estates  of 
France  under  Napoleon,  by  which  agriculture  was  greatly  im- 
proved, and  also  to  the  division  by  Henry  VIII  of  England  of  the 
large  landed  properties  held  by  the  monasteries  during  the  six- 
teenth century,  and  the  beneficial  effect  of  this  division  upon  the 
commercial  welfare  of  the  kingdom.  Under  the  English  law  of 
primogeniture  the  eldest  son  inherits  the  entire  estate  of  his 
father,  and  as  a  consequence  there  are  yet  large  bodies  of  land 
in  England  which  have  been  held  intact  by  a  single  individual 
and  his  descendants  from  generation  to  generation  for 
hundreds  of  years,  and  which  cannot  be  sold  or  di- 
vided. This  is  greatly  to  the  disadvantage  of  the  agri- 
cultural classes.  To  be  able  to  own  the 
Land  Tenures  little  farm  which  hc  tills  is  a  great  encouragement 
to  the  small  farmer.  He  at  once  becomes  interested 
in  its  proper  and  successful  tillage,  takes  care  of  the  improve- 
ments, and  is  decidedly  a  better  farmer.  The  law  of  primo- 
geniture and  also  the  English  doctrine  of  entailment,  whereby 
a  testator  can  limit  or  restrict  the  future  ownership  of  an  estate 


♦The   time  between   Chicago  and  New   York  has   now   been   reduced   to 
twenty   hours. 


142  HISTORY    OF    COMMERCE. 

to  certain  persons  and  their  heirs,  was  introduced  into  this 
country  as  a  part  of  the  common  law  of  England,  from  which 
our  system  of  jurisprudence  was  borrowed.  These  laws 
were  like  a  "dead  hand"  upon  the  land,  sending  it  down  for  gen- 
erations in  the  line  of  the  eldest  male.  The  aristocratic  families 
in  New  York  and  south  of  Pennsylvania  were  favorable  to  these 
laws,  as  sustaining  and  perpetuating  their  leadership.  Massa- 
chusetts abolished  these  laws  of  inheritance  but  recognized  their 
spirit  to  a  degree  by  giving  a  double  portion  to  the  eldest 
son,  according  to  the  Mosaic  code,  but  divided  the  rest  among 
the  daughters  as  well  as  the  sons,  and  this  system  prevailed 
generally  throughout  New  England  and  also  in  Pennsylvania; 
but  after  the  American  Revolution,  the  founders  of  our  repub- 
lic, recognizing  its  injustice  to  a  portion  of  the  heirs  of  an 
estate,  and  its  objectionable  feature  as  a  hinderance  to  commer- 
cial progress,  chiefly  through  the  efforts  of  Thomas  Jefferson, 
abolished  it.  Estates  in  this  country  can  be  subdivided  or 
transferred  with  ease,  and  are  free  from  many  of  the  prescriptive 
rights  and  entailments  which  prevent  or  hinder  transfers  of 
titles  to  land  in  the  older  countries.  By  a  convenient  system 
of  surveying  the  land  and  dividing  it  into  counties,  townships 
and  sections,  located  with  reference  to  established  meridians, 
and  the  recording  of  titles  upon  public  books  of  record,  the 
transfer  of  land  is  encouraged  and  made  easy.  This,  we  believe, 
has  had  a  marked  effect,  upon  not  only  the  agricultural  classes, 
by  inducing  thrift  and  industr}^,  but  also  upon  the  general 
progress  and  commercial  welfare  of  the  nation. 

To  signalize  the  attainment  of  the  one  hundredth  anniver- 
sary of  the  birth  of  the  republic  a  great  exposition  was  held 
in  the  city  of  Philadelphia  in  1876,  in  which  were  exemplified  the 
wonderful  improvements  in  the  industrial  and  mechanical  arts 
made  since  the  Crystal  Palace  exposition  in  New  York  in  1853. 
From  the  mammoth  Corliss  engine,  which  put  in  motion  fourteen 
acres  of  innumerable  steel  and  iron  organisms,  the  visitor  could 


EXPOSITIONS.  148 

examine  the  processes  of  nearly  every  important  manufacture  on 
the  globe.  Numerous  great  palaces,  each  devoted  to  a  particular 
department  of  human  activity  or  achievement,  were  completely 
filled  with  extensive  and  interesting  exhibits,  from  not  only  the 
United  States  but  from  all  parts  of  the  world.  Egypt  sent  speci- 
mens of  corn,  cotton,  sugar,  woods,  fruit,  honey  and  perfumery; 
Australia  sent  wool,  iron,  wood,  tin  and  agricultural  products; 
Centennial  Switzerland,  her  far-famed  watches;  Norway  and 

Exposition  Sweden,  their  glass  work,  wood  carvings,  porcelain, 

'  ^^  iron  and  steel;  Holland,  her  excellent  models  of 

dikes  and  sea  coast  defenses,  bridges  and  dams;  China,  her  jars, 
vases  and  other  ceramics;  Japan,  her  porcelain  and  bronzes; 
Italy,  her  fine  art  contributions;  France,  her  vases,  statuary,  tex- 
tiles and  wines;  England,  her  woolens,  cotton  and  silk  goods, 
hardware,  etc.,  and  thus  the  infinite  collection  was  made  up, 
proving  to  be  a  vast  object  lesson  upon  the  achievements  of  the 
race  and  the  brotherhood  of  man. 

The  Centennial  Exposition  was  only  surpassed  by  the  World's 
Columbian  Exposition  held  in  Chicago  in  1893  to  commemo- 
rate the  400th  anniversary  of  the  discovery  of  America.  In 
magnitude  and  grandeur  the  palaces  of  the  White  City  surpassed 
those  of  any  exposition  ever  previously  attempted.  While  the 
displays  were  commensurate  with  the  beauty,  variety  and  extent 
of  the  Palaces  in  which  they  were  installed,  the  one  great  dis- 
tinguishing feature  of  the  exposition  of  1893  was  the  display  in 
World's  coium-  elcctricity.  In  1876  the  telegraph  constituted  al- 
bian  Exposition  most  thc  solc  practical  application  of  electricity  to 
*^  the  utilities  of  man,  but  in  1893  we  had  the  elec- 

tric light  in  its  varied  forms,  the  electric  motor  for  the  propul- 
sion of  machinery  and  cars,  the  telephone  and  numerous  other 
adaptations  of  this  wonderful  though  subtle  power.  The  one 
great  lesson  of  this  exposition  was,  that  we  had  been,  and  were, 
passing  through  an  age  of  invention.  Thousands  of  examples 
were  to  be  seen  on  every  hand  of  inventions  which  multiplied 


144  HISTORY    OF    COMMERCE. 

human  control  over  natural  forces.  In  the  language  of  President 
McKinley  at  the  Pan-American  Exposition,  his  last  public  ad- 
dress, ^'Expositions  are  the  timekeepers  of  progress.  They  record 
the  world's  advancement.  They  stimulate  the  energy,  enter- 
prise and  intellect  of  the  people  and  quicken  human  genius." 

Through  the  inventive  genius  of  man,  manufactures  have 
been  cheapened  during  the  past  hundred  years,  while  at  the 
same  time  the  price  of  labor  has  constantly  advanced  and  the 
hours  have  shortened,  thus  greatly  improving  the  condition  of  the 
working  clashes.  In  1790  carpenters  received  60  cents  a  day; 
in  1800,  70  cents;  in  1810,  $1.09;  in  1820,  $1.13;  in  1830  to 
1840,  $1.13  to  $1.40,  and  about  the  same  up  to  1860;  in  1880, 
$2.42;  and  in  1890,  $3.50,  with  the  day  shortened 
Rate  of  Wages  from  ten  hours  to  eight.  Common  laborers  in 
1790  received  43  cents  a  day;  in  1800,  62J  cents; 
in  1810,  82  cents;  from  1810  to  1820,  something  over  90  cents; 
and  1840  to  1860,  from  874  cents  to  $1  per  day.*  While  ma- 
chinery has  displaced  hand  labor,  new  industries  have  sprung 
up  to  furnish  work  for  all  willing  hands,  and  the  shortening  of 
the  hours,  with  better  pay,  has  given  workmen  time  and  means 
for  self-improvement  and  social  enjoyment.  Under  the  modern 
factory  system  men  are  brought  into  closer  relationship  with 
others,  and  as  a  consequence  a  higher  standard  of  intelligence 
prevails.  Low  grades  of  labor  are  constantly  giving  place  to  edu- 
cated labor,  and  what  are  luxuries  to  one  generation  become 
necessaries  to  the  generations  which  follow.  This  is  illustrated 
by  the  fact  that  "there  was  a  time  when  a  linen  sheet  was  worth 
thirty-two  days  of  common  labor,  and  a  gridiron  cost  from  four 
to  twelve  days'  labor." 

In  1898  the  Hawaiian  Islands  were  annexed  and  now  form 
a  territory  of  the  United  States.  Their  chief  productions  are 
sugar,  coffee,  rice  and  bananas,  the  principal  export  being  raw 
sugar.    The  chief  value  of  the  islands,  however,  lies  in  the  fact 


♦Wright's  Industrial  Evolution  in  the  United  States. 


ISLAND    POSSESSIONS.  U6 

that  they  are  situated  at  the  crossing  of  the  routes  of  ocean 
travel  between  America,  Asia  and  Australia,  and  afford  a  con- 
Hawaiian  and  venieht  coaling  and  supply  station  for  ocean  ves- 
Phiiippine  sels.     As  a  result  of  the  Spanish-American  War, 

Islands  gp^.j^  ^^^g^  ^^  ^j^g  United  States  in  1899  the  island 

of  Porto  Rico,  one  of  the  Antilles,  and  the  extensive  group  of 
the  Philippines  in  the  Pacific.  Porto  Rico  produces  cotton, 
sugar,  coffee,  fine  tobacco  and  tropical  fruits.  The  climate  is 
healthful,  and  the  island  will  no  doubt  be  greatly  improved  and 
developed  by  American  capital.  The  Philippines  are  of  volcanic 
origin,  with  mountain  ranges  predominant,  but  the  valleys  are 
adapted  to  tropical  argiculture.  The  coast  lands,  plains  and 
valleys  produce  large  quantities  of  Manila  hemp,  raw  sugar, 
tobacco  and  cocoanuts.  The  Manila  hemp  is  of  a  superior  qual- 
ity, and  the  islands  have  practically  a  monopoly  of  the  industry. 
The  United  States  and  Great  Britain  take  nearly  all  of  the  crop. 
While  the  United  States  has  for  many  years  bought  more  than 
one-fourth  of  the  Philippine  exports,  its  share  of  the  imports 
has  been  small.  Under  the  new  relation,  however,  as  a  territory 
of  the  republic  our  trade  will  no  doubt  greatly  extend.  The 
greatest  value  of  the  Philippines  to  the  United  States,  however, 
will  no  doubt  prove  to  be  their  proximity  to  Asia,  and  the  aid 
they  will  afford  in  securing  and  carrying  on  an  important  and 
constantly  expanding  trade  with  China,  where  our  manufactures 
are  now  being  introduced. 

Our  total  export  for  the  year  ending  June  30, 1901,  amounted 
to  the  enormous  sum  of  $1,487,764,991,  being  the  largest  volume 
of  exports  during  any  year  in  the  history  of  the  republic.  Of 
this  sum  $944,000,000,  or  nearly  65  per  cent.,  were  the  products 

of  agriculture,  and  of  these  breadstuffs,  such  as 
Commerce  whcat,  com,  rye,  oats,  barley,  etc.,  amounted  to 

$276,000,000;  cotton,  $314,000,000;  provisions, 
comprising  meats  and  dairy  products,  $197,000,000;  animals, 
including  horses,  cattle,  hogs,  sheep,  mules  and  poultry,  $52,- 


146  HISTORY    OF    COMMERCE. 

000,000;  raw  tobacco,  $28,000,000;  oil  cake,  $18,000,000.  The 
exports  from  the  products  of  our  mines,  including  coal  and* 
mineral  oils,  amounted  to  $28,000,000,  or  2  6-10  per  cent.;  of 
our  forests,  $55,000,000,  or  about  3 J  per  cent.;  and  fisheries, 
$8,000,000,  or  about  ^  per  cent.  The  total  export  of  the  prod- 
ucts of  our  manufactures  in  1901  amounted  to  $412,000,000, 
or  about  28^  per  cent,  of  the  whole.  The  total  imports  of  the 
United  States  in  1901  amounted  to  $823,172,165,  leaving  a 
balance  of  trade  in  our  favor  of  $664,592,826.  The  total  manu- 
factures of  the  United  States  now  foot  up  annually  $13,000,000,- 
000,  which  is  about  forty  per  cent,  of  the  entire  manufactures  of 
the  world.  This  enormous  increase  of  manufactures*  places  the 
United  States  in  the  ranks  of  the  great  manufacturing  nations  of 
the  world;  and  whereas  heretofore  our  exports  have  been  chiefly 
agricultural  products,  we  may  expect  in  the  future  a  large  in- 
crease in  the  exports  of  our  manufactures.  We  are  now  supply- 
ing Europe  with  articles  which  we  formerly  imported,  and 
American  products  are  establishing  a  reputation  for  excellence 
in  foreign  markets.  With  the  natural  factors  of  production 
yet  largely  undeveloped  and  in  no  prospect  of  exhaustion,  aided 
by  the  genius  of  the  American  inventor  and  the  capacity  and 
enterprise  of  the  American  business  man,  wc  believe  the  com- 
mercial future  of  the  United  States  is  destined  to  a  remark- 
able development.  Social  and  industrial  problems  may  confront 
us,  such  as  combinations  of  capital  and  labor,  tariff  and  finance, 
but  let  us  hope  that  these  may  all  be  wisely  solved,  and  that  as 
our  commerce  grows  in  greatness  it  may  be  governed  by  the 
principle  of  right. 

♦In  1870  our  total  manufacturing  amounted  to  about  $4,250,000,000,   or 
less  than  one-third  of  their  present  value. 


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4 


MONEY, 


CHAPTER  XIV. 

NATURE   AND   USE   OF    MONEY. 

AS    AN    ELEMENT    IN    CIVILIZATION;    KINDS;     BARTER; 
ESSENTIALS   OF    MONEY. 

Having  traced  briefly  the  history  of  the  commerce  of  dif- 
ferent nations  and  times,  we  shall  now  proceed  to  consider  the 
nature  and  uses  of  one  of  the  most  important  instruments  of 
commerce,  viz.,  money. 

Under  a  republican  form  of  government,  where  every  citizen 
is  interested  as  a  factor  in  making  the  laws,  either  directly  or 
indirectly,  it  is  of  prime  importance  that  the  subject  of  money 
Importance  of  should  be  undcrstood.  Under  a  clever  play  of 
an  Understand-  words,  politicians  oftcn  deceive  the  masses  and  lead 
Subject  them  into  dangerous  fallacies  upon  this  subject, 

the  result  of  which  may  be  financial  legislation  of  the  most 
serious  and  perhaps  disastrous  character.  Nothing  which  Con- 
gress can  do  will  so  directly  and  vitally  affect  the  interests  of  the 
people  for  their  welfare  and  happiness,  or  their  discouragement 
and  misery,  as  legislation  upon  this  point,  and  likewise  when 
questions  of  monetary  policy  arise  in  the  executive  branch  of 
our  government,  the  policy  pursued  by  the  president  is  of  vital 
importance  to  the  people.  If,  for  instance,  owing  to  changes  in 
our  financial  policy  there  is  a  general  rise  in  prices,  debtors  will 
gain  at  the  expense  of  creditors;  a  tenant  with  a  long  lease  at 
a  fixed  rental  will  gain  at  the  expense  of  the  landlord,  and  vice 
versa.  Thus  one  class  will  receive  greater  benefit  and  advantage 
from  the  general  wealth  and  prosperity  of  the  country  than 
another. 

147 


148  MONEY. 

The  immense  power  for  evil  which  may  be  caused  by  a  gov- 
ernment changing  the  currency  is  aptly  described  by  Lord 
Effects  of  Macaulay  when  he  refers  to  the  condition  of  af- 

Changesinthe      fairs  in  England  at  the  close  of  the  16th  century, 
urrency  when  the  currcucy  was  debased  by  Henry  VIII  and 

Edward  VI.  He  says:  "It  may  be  doubted  whether  all  the 
misery  which  has  been  inflicted  on  the  nation  in  a  quarter  of  a 
century  by  bad  kings,  bad  parliaments  and  bad  judges  was  equal 
to  the  misery  caused  in  a  single  year  by  bad  crowns  and  bad 
shillings.  The  evil  was  felt  daily  and  almost  hourly  in  almost 
every  place  and  by  almost  every  class.^'  A  similar  state  of  affairs 
existed  in  France  after  the  Eevolution,  when  the  constitutional 
government  flooded  the  country  with  irredeemable  paper  money. 
"What  the  bigotry  of  Louis  XIV  and  the  shiftlessness  of  Louis 
XV  could  not  do  in  nearly  a  century  was  accomplished  by  thus 
tampering  with  the  currency  in  a  few  months.  Commerce  was 
dead — betting  took  its  place."  Thus  we  see  the  importance  of 
universal  enlightenment  upon  this  subject  of  money,  if  we  would 
protect  ourselves  from  the  evils  which  result  from  ignorance. 

Man  in  his  primitive  and  barbarous  condition  lived  upon  the 
spontaneous  production  of  the  ground.  Advancing  a  little  in 
Man  in  the  ^^^  ^^^^®  ^^  civilization,  he  made  a  few  rude  im- 

Lowest  plements  such  as  a  bow  and  arrow,  a  spear  and 

Civilization  fish-hook  by  which  he  was  able  to  better  supply 

his  wants.  Thus  far  his  individual  needs  were  supplied  by  his 
own  efforts  or  those  of  other  members  of  his  family  or  tribe,  but 
as  he  advances  a  little  higher  in  the  scale  of  intelligence  and 
his  wants  increase  he  learns  that  it  is  an  advantage  to  exchange 
the  products  of  his  labor  for  those  products  of  the  labor  of 

others  which  he  does  not  possess.  The  hunter 
Barter  cxchauges  a  carcass  of  meat  or  a  skin,  the  product 

of  the  chase,  for  a  bag  of  corn;  the  herdsman  ex- 
changes with  the  carpenter,  the  tailor  with  the  fisherman,  etc. 
This  is  called  barter.     This  is   the  beginning   of  commerce. 


MEDIUM     OF    EXCHANGE.  149 

Here  is  the  commencement  of  ^'division  of  labor/'  that  principle 
which  has  produced  such  a  high  degree  of  efficiency  in  the  arts 
and  sciences  of  our  time.  But  observe  the  disadvantage  of  the 
system.  The  herdsman  may  have  sheep  to  exchange  for  a  coat, 
but  the  tailor  may  not  need  sheep,  while  the  carpenter  may  need 
sheep,  but  the  herdsman  may  not  require  the  services  of  the  car- 
penter, and  thus  the  difficulty  would  always  be  to  find  a  person 
willing  to  make  the  desired  exchange.  In  the  early  stages  of 
society  when  wants  are  few  and  simple  the  difficulties  may  be 
overcome,  but  as  man  progresses  and  his  wants  multiply,  it 
becomes  increasingly  difficult  for  the  members  of  the  community 
to  make  satisfactory  exchanges. 

From  the  foregoing  we  see  that  exchange  is  a  necessity  of 
civilized  life  and  in  order  to  effect  exchanges  to  any  considerable 
extent  a  "medium  of  exchange"  (money)  is  necessary.  The 
earliest  form  of  money  was  probably  the  skins  of  fur  bearing 

animals,  and  these  are  still  used  as  a  medium  of 
Exchange^  exchange  among  the  Indians  in  the  far  northern 

part  of  North  America.  Dried  fish,  shells  and 
beads  were  used  as  money  by  other  Indian  tribes.  The  early 
Greeks  and  Romans  used  cattle  and  wine  as  money.  Our  own 
history  in  colonial  times  furnishes  numerous  examples  of  various 
articles  having  been  used  as  money,  among  which  may  be  men- 
tioned tobacco  in  Virginia  and  Maryland  and  corn  in  Massa- 
chusetts. The  Pilgrim  fathers  found  the  aborigines  using 
wampum  as  both  an  article  of  adornment  and  a  medium  of  ex- 
change throughout  New  England.  It  was  a  kind  of  bead  made 
from  a  species  of  shell  found  in  sea  water.  These  beads  were  of 
different  sizes  and  colors,  and  their  value  was  correspondingly 
different.  This  species  of  money  was  an  important  factor  in 
the  early  civilization  of  New  England.  It  brought  the  furs  from 
the  north  and  west  to  the  Massachusetts  colonists  and  they  in 
turn  exchanged  these  for  sugar,  tools  and  other  commodities 
with  the  English  and  Dutch  traders.    During  the  early  settle- 


160  MONEY. 

ment  of  California  by  the  gold  seekers  of  ^49,  gold  dust  by 
weight  was  used  as  a  medium  of  exchange. 

Rising  higher  in  the  scale  of  civilization,  we  see  the  im- 
portance of  having  a  better  medium  of  exchange.  It  must  be  a 
Precious  Commodity  with  great  value  in  small  compass.    It 

Metals  as  must  bc  Something  in  universal  demand,  so  that 

°"^^  it   will   circulate   widely;   it   must   be   something 

that  is  durable  and  will  not  suifer  from  decay  or  rust  when 
stored  or  from  wear  when  in  use;  it  must  be  something  that  is 
divisible  so  that  a  great  variety  of  denominations  may  be  made 
for  use  in  the  multitude  of  exchanges  large  and  small.  All  of 
these  qualities  point  at  once  to  the  precious  metals  as  the  most 
suitable  articles  to  constitute  the  money  of  civilized  man.  Gold 
and  silver  are  sufficiently  rare  to  embrace  great  value  in  small 
space;  they  are  distributed  over  the  entire  globe,  like  the  human 
race,  and  their  quality  is  always  the  same  wherever  found. 
Besides,  they  are  metals  which  can  -be  readily  used  for  other 
purposes  than  for  coinage,  in  case  there  should  be  a  temporary 
overproduction  of  them,  so  that  their  purchasing  power  may 
be  said  to  be  more  uniform  and  universal  than  that  of  any  other 
commodity.  They  are  practically  indestructible,  being  capable 
of  resisting  rust,  and  when  combined  with  an  alloy  of  harder 
metal,  suffer  little  from  abrasion.  Gold  may  be  refined,  and  al- 
loyed, united  and  divided,  with  absolutely  no  loss  whatever  of 
the  pure  metal.  Silver  suffers  a  very  slight  loss  under  such 
treatment.  It  was  soon  discovered,  too,  that  to  reduce  the  wear 
and  tear  to  the  minimum  the  most  convenient  form  in  which 
the  metals  could  be  coined  for  use  as  money  was  round  with 
flat  sides  to  receive  the  inscription  or  stamp  of  value  and  milled 
edges  to  prevent  clipping. 

As  previously  stated,  gold  and  silver  are  used  extensively 
for  articles  of  adornment  and  as  jewelry,  tableware,  etc.,  and 
it  is  probable  that  their  general  usefulness  as  commodities  first 
suggested  their  use  as  money.    The  fact  must  not  be  lost  sight 


COINAGE.  151 

of  by  the  student  of  this  subject  that  real  money  is  a  commodity, 

and  the  selling  of  corn  for  gold  is  an  act  of  barter.    The  word 

barter  is  commonly  used  to  signify  the  exchange 

Money  is  a  £  article   for   another   without   the   use    of 

Commodity 

money,  but  it  must  be  remembered  that  all 
trade  is  barter  when  the  precious  metals  are  employed  as  equiva- 
lents, since  these  are  commodities.  This  important  fact  forms 
the  basis  for  a  correct  understanding  of  the  entire  science  of 
money. 

It  will  thus  be  apparent  that  the  coinage  of  a  precious  metal, 

while  it  changes  its  form,  does  not  destroy  its  character  as  a 

commodity,  and  the  exchange  of  the  substance, 

n!l"^^^-  \  whether  coined  or  in  its  crude  state,  is  an  act  of 

Convenience  ' 

barter.  In  fact  it  is  not  necessary  that  the  metal 
or  other  substance  used  as  money  should  be  coined  at  all.  Gold 
and  silver  were  used  as  money  before  they  were  coined.  They 
were  then  measured  by  weight,  and  to  avoid  this  inconvenience 
the  stamp  was  put  upon  them  indicating  the  weight,  which, 
says  Aristotle,  was  afterwards  taken  to  indicate  value  also.  All 
that  coinage  does  is  to  save  the  trouble  of  innumerable  weigh- 
ings and  assayings  which  would  hamper  trade  and  prove  so 
troublesome  and  inconvenient  as  to  largely  destroy  the  usefulness 
of  money  as  a  measure  of  value.  Another  advantage  in  coins  of 
the  precious  metals,  early  recognized,  was  their  durability.  There 
was  serious  shrinkage  and  deterioration  in  fish  or  tobacco,  as 
money,  and  hides  were  not  divisible,  while  all  of  these  articles 
were  not  easily  transferred  or  transported  from  place  to  place. 

All  writers  agree  that  the  essentials  of  a  good  kind  of  money 
are  durability,  portability,  divisibility,  homogeneity  and  uniform- 
ity in  value.  These  qualities  seem  to  exist  in  gold 
Money**  *°  and  silver  to  a  greater  extent  than  is  embodied  in 
any  other  two  metals.  Gold  and  silver,  being  com- 
modities, are  of  course  subject  to  some  fluctuations  in  value, 
and  silver  especially  has  shown  a  marked  change  in  value  in 


152  «     MONEY. 

recent  years,  but  on  the  whole  these  metals  are  nearest  uniform 
in  value — fluctuate  less  than  other  commodities.  Divisibility  is 
the  quality  which  permits  a  metal  to  be  divided  without  loss 
of  value.  When  a  $20  gold  piece  is  cut  into  a  number  of  small 
parts,  the  sum  of  these  will  be  $20  less,  of  course,  the  few  atoms 
lost  in  the  operation  of  cutting,  which  are  very  insignificant. 
All  parts  of  metallic  money  should  be  homogeneous,  that  is,  of 
the  same  quality,  so  that  equal  weights  will  have  exactly  the 
same  value.  There  may  be  different  qualities  of  steel  or  iron, 
but  of  pure  gold  or  silver  there  is  only  one  quality. 

As  an  instrument  of  commerce  and  an  aid  to  the  progress 
and  welfare  of  man,  money  is  indispensable.  Without  it  divis- 
ion of  labor  to  any  considerable  extent  would  be 
AMtTprogr^ess  impossiblc;  there  would  be  little  inducement  to 
work  when  the  products  of  one's  labor  could  not 
be  disposed  of  without  finding  persons  who  happened  to  want 
such  commodities  and  have  others  to  give  in  return  that  he 
himself  would  desire.  The  fact  that  there  is  in  universal  circula- 
tion a  commodity,  the  holders  of  which  are  ready  to  exchange 
for  the  services  of  the  farmer,  mechanic,  artist  and  inventor, 
is  a  stimulus  to  effort  and  industry,  and  brings  thousands  of 
products  to  market  which  could  otherwise  never  have  come  into 
existence.  The  use  of  money  tends  to  bring  mankind  into 
closer  relations  of  inter-dependence,  thus  broadening  the  mind 
and  character,  and  teaching  indirectly  the  doctrine  of  the 
universal  brotherhood  of  man.  By  distributing  the  products 
of  labor  over  the  earth's  surface  where  and  when  they  are 
needed,  it  is  the  means  of  banishing  famine,  while  on  the  other 
hand  the  absence  of  money  tends  to  isolate  man.  Isolation 
breeds  suspicion  and  jealousy  and  these  lead  to  strife,  war,  slav- 
ery and  famine. 


CHAPTEK  XV. 

FUNCTIONS    AND    KINDS    OF    MONEY. 

FOUR    FUNCTIONS;    SUBSIDIARY    COIN;    COMPARATIVE    VALUE    OP 
SILVER  AND  GOLD;  DEMONETIZATION  OF  SILVER,   ETC. 

Money  has  four  functions,  viz.:  1.  A  medium  of  exchange. 
2.  A  measure  of  value.  3.  A  standard  of  value  for  future  pay- 
ments.   4.  A  store  of  value. 

Money  is  as  essential  to  the  interchange  of  commodities  as 
language  is  to  the  interchange  of  ideas.  Without  some  com- 
mon medium  of  exchange  it  would  be  absolutely 
ExchangT°  impossiblc  to  Carry  on  the  manufactures  and  com- 
merce of  the  country.  The  rude  system  of  barter- 
ing one  product  for  another  as  the  parties  may  each  need,  is 
only  adapted  to  a  low  civilization  where  wants  are  few  and  sim- 
])le.  The  history  of  civilization  and  progress  is  concurrent  with 
the  history  of  money.  The  breaking  up  of  feudalism  in  the 
middle  ages,  and  the  growth  of  commerce,  was  due  largely  to  the 
introduction  and  use  of  money,  by  which  the  vassals  were  able 
to  pay  their  rent  in  money  instead  of  services. 

In  order  to  effect  exchanges  of  commodities  there  must  be 
an  equality  of  values,  and  in  order  to  establish  this  equality  of 
values  a  measure  of  value  is  necessary.  A  meas- 
vaiue  ^^^  ^^  value  in  the  exchange  of  commodities  is 

as  necessary  as  the  yard  stick  or  pound  weight  in 
measuring  quantities.  It  is  useless  to  convert  all  things  into 
terms  of  money  as  a  medium  of  exchange  unless  this  is  done  at 
certain  rates,  for  without  fixing  the  rate  or  measure  of  value 
between  commodities  no  exchange  is  possible.  In  this  country 
the  standard  unit  of  value  is  the  gold  dollar  consisting  of  a 
certain  amount  of  gold  and  alloy  fixed  by  act  of  Congress,  and 
all  values  are  measured  in  dollars  or  parts  of  a  dollar.     Al- 

153 


164  MONEY. 

though  the  gold  dollar  is  the  standard;,  it  is  not  necessary  that 
all  payments  be  made  in  gold  dollars.  We  use  silver,  nickel, 
copper  and  paper  as  actual  mediums  of  exchange,  but  of  course 
they  are  all  founded  upon  the  gold  dollar  as  the  standard.  A 
farmer  agrees  to  pay  a  fixed  proportion  of  his  produce  as  rent, 
say  one-third  of  his  corn,  but  when  the  time  arrives  for  payment 
he  may,  by  agreement  with  the  landlord,  pay  in  gold,  silver, 
paper,  wheat,  cattle  or  any  other  commodity,  the  quantity 
being  measured,  of  course,  by  the  value  in  gold  dollars.  In 
other  words,  the  medium  of  exchange  or  payment  may  be 
different  from  the  measure  of  value.  We  may  measure  in  one 
thing,  and  pay  in  another.  The  medium  of  exchange  would  be 
useless  unless  measured  in  terms  of  the  standard,  and  the  meas- 
ure would  be  useless  without  some  medium  of  exchange  by  which 
the  transaction  could  be  carried  out.  A  person  having  an  article 
for  sale  desires  to  know  what  its  value  is,  compared  with  other 
articles;  that  is,  to  have  it  measured  by  a  common,  recognized 
standard  of  value,  but  he  also  desires  that,  when  he  is  ready 
to  sell  the  article,  there  shall  be  a  medium  of  exchange  by  which, 
he  can  dispose  of  all,  or  as  much  of  it  as  he  desires,  without 
having  to  resort  to  the  primitive  system  of  barter. 

Since  many  contracts  involve  the  payment  of  money  at  some 
distant  future  time  it  is  essential  that  money  should  possess 
A  Standard  of  stability  or  Uniformity  of  value.  Suppose  that  in 
Value  for  Fut-  the  casc  of  a  lease  for  many  years  the  tenant 
ure  Payments  agpegg  to  pay  a  fixed  rental  in  gold,  and  during  the 
term  of  the  lease  the  production  of  gold  at  the  mines  should 
be  greatly  increased — doubled,  say.  The  result  would  be  that 
the  value  of  gold  would  diminish  and  its  purchasing  power 
would  be  reduced.  Prices  of  other  commodities  would  rise. 
A  gold  dollar  would  not  buy  as  much  of  anything  as  it  did 
before.  Now  the  tenant  would  be  able  to  sell  his  goods  at  higher 
prices  but  his  rent  would  remain  the  same  in  dollars.  In  this 
case   the  landlord  would  suffer  a   disadvantage.      Suppose,   on 


PF  STANDARD    OF    VALUE.  166 

the  contrary,  that  the  mines  failed  to  yield  the  customary  amount 
of  gold  for  a  series  of  years  and  gold  became  scarce.  Its  scarcity 
would  increase  its  value.  Then  a  dollar  of  gold  would  have 
greater  purchasing  power  and  prices  of  other  commodities  would 
fall.  The  rent  under  this  long  term  lease  would  remain  the 
same,  however,  and  the  tenant  must  now  pay  his  rent  in  dearer 
money.  The  landlord  in  this  case  would  reap  an  advantage, 
as  he  would  be  getting  a  higher  rent — the  same  rent  nominally, 
but  of  greater  purchasing  power. 

The  whole  fabric  of  the  business  world  is  made  up  of  an 
endless  series  of  contracts,  many  of  them  extending  into  years 
of  futurity  for  their  fulfillment,  such  as  contracts 
Contracts  ^^^  futurc  delivery  of  goods,  leases  of  houses  and 

lands,  hiring  of  services  for  a  term  of  years,  the 
settlement  of  estates  of  inheritance  to  be  made  upon  the  ma- 
turity of  minors,  or  the  payment  of  pensions,  annuities  or  life  in- 
I'surance,  and  it  is  important  in  all  such  undertakings  that  the 
money  which  is  our  standard  of  value  now,  and  the  basis  on 
which  the  contract  is  made,  shall  continue  uniform  and  finally 
possess  the  same  value  or  purchasing  power  at  the  end  of  the 
])eriod  of  time  for  which  the  contract  runs. 

Were  our  standard  of  value  such  a  commodity  as  wheat,  an 
abundant  crop  would  diminish  its  purchasing  power  and  cor- 
respondingly raise  prices  of  other  commodities  and  vice  versa  to 
the  serious  injury  of  one  class  and  the  benefit  of  another.  For- 
tunately for  the  commodity  gold,  which  all  of  the  most  advanced 
nations  have  chosen  as  their  standard  of  value,  its  production 
is  remarkably  uniform.  The  earth  yields  a  constant  and  never- 
failing  supply  of  the  precious  metal,  not  of  such  abundance  as 
to  affect  its  value  or  relieve  man  of  the  necessity  of  giving  back 
value  in  labor  for  value  in  gold  received,  yet  in  sufficient  meas- 
ure to  repay  the  effort  in  seeking  and  mining  it.  It  costs  sub- 
stantially a  dollar  in  labor  generally  to  get  a  dollar's  worth  of 
gold  out  of  the  earth  and  coin  it  into  money.     Thus  gold  is 


156  MONEY. 

especially  adapted  to  perform  this  function  of  the  money  stand- 
ard of  value  for  future  payments. 

Money  may  be  said  to  perform  a  fourth  function — that  of  a 
convenient  means  of  storing  value.  When  acting  as  a  medium 
of  exchange  it  circulates  back  and  forth  in  the 
y^iyg  same  locality,  and  may  sometimes  return  to  the 

same  person,  but  at  times  a  person  desires  to  con- 
dense his  wealth  into  small  space  and  perhaps  transport  it  to  a 
distant  country,  or  hoard  it  away  for  a  time.  Money  in  the 
form  of  the  precious  metals  affords  a  convenient  means  of  doing 
this.  It  is  true  that  other  commodities  of  small  bulk,  imperish- 
able quality,  and  great  value,  such  as  diamonds  or  other  precious 
stones,  might  be  used  for  hoarding,  and  sometimes  are,  but 
their  value  is  not  affixed  or  stamped  thereon,  and  their  future 
value  may  not  be  uniform  or  stable.  Gold  coin  is  an  exception- 
ally convenient  means  of  hoarding  or  transporting  money,  and 
the  facility  with  which  it  can  be  hoarded  has  a  manifest  tendency 
to  beget  economy  and  encourage  accumulation,  especially  among 
the  industrial  classes.  The  large  number  of  savings  banks 
throughout  the  United  States,  with  their  enormous  total  of  de- 
posits and  millions  of  depositors,  is  largely  the  effect  of  frugality 
and  saving  caused  by  the  facility  which  the  precious  metals 
afford  for  hoarding  or  storing  value. 

Subsidiary  coin  or  "token  money"  may  be  defined  as  coin, 

the  nominal  value  of  which  as  money  is  greater  than  its  value 

as  metal,  even  making  allowance  for  the  cost  of  coinage.    When 

the  government  in  1834  changed  the  legal  rate  of 

Subsidiary  ^.j^^^  ^^  ^^j^  ^^^^   ^^   ^^   ^  ^^  ^^^  ^^^.^  ^^  ^g  ^^   ^^ 

making  sixteen  grains  of  pure  silver  equal  to  one 
of  pure  gold,  the  silver  dollar  then  became  of  greater  value  than 
the  gold  dollar  by  2^  cents.  Naturally  people  preferred  to 
pay  their  debts  in  the  cheaper  metal,  gold,  and  silver  ceased  to 
circulate.  People  who  had  silver  on  hand  either  converted  it 
to  other  uses  or  sold  it  to  brokers  who  melted  it  into  bullion 


TOKEN    MONEY.  167 

and  exported  it  to  other  countries  where  its  full  value  could  be 
realized.  We  were  then  without  silver  for  fractional  aurrency, 
except  worn  halves,  quarters  and  dimes  which  had  lost  2J  per 
cent,  of  their  value  by  abrasion,  and  hence  were  equal  in  value 
to  so  many  cents  in  gold.  Then  the  increased  supply  of  gold 
from  California  in  1850  caused  a  still  further  advance  of  If 
per  cent,  in  the  price  of  silver,  driving  still  more  of  the  white 
coin  out  of  the  country,  and  causing  the  remaining  coins  to  be 
still  lighter  and  smoother.  To  remedy  this  difficulty  and  supply 
the  country  with  silver  for  fractions  of  a  dollar,  Congress  in 
1853  passed  a  law  providing  for  the  coinage  of 
Law  of  1853  new  silver  half  dollars,  quarters,  dimes  and  half 

dimes  about  seven  per  cent  lighter  than  the  former 
ones.  There  being  no  inducement  to  melt  these  coins  into 
bullion  or  export  them,  they  circulated  at  par  with  gold  (except 
during  the  suspension  of  specie  payments),  although  their 
metallic  value  was  considerably  less  than  their  nominal  value 
as  silver.  This  was  the  beginning  of  silver  as  subsidiary  coin 
in  the  United  States. 

The  price  of  silver  continued  to  fall,  as  compared  with  gold, 
until  1874,  but  during  all  of  this  time  no  silver  dollars  were  in 
circulation,  silver  being  worth  more  than  gold.  In  1873  Con- 
gress passed  an  act  demonetizing  silver.  The 
ofTuve*r^*'*°°  JTietal  in  the  silver  dollar  at  the  time  of  the  pas- 
sage of  the  demonetization  act  was  worth  two 
cents  more  than  a  gold  dollar,  but  the  price  of  silver  has  since 
continued  to  decline  until  it  has  become  worth  less  than  half 
its  nominal  value*.  It  now  circulates  freely  as  subsidiary  coin, 
since  the  amount  of  silver  coined  and  in  circulation  is  limited 
and  it  is  receivable  for  all  public  dues.  Receiving  it  for  public 
dues  is   one   way   of  redeeming   the   coin.      Besides   silver  we 


♦Congress  passed  an  act  in  February,  1878,  remonetizing  silver,  but  not- 
witlistandlng  tills  its  value  has  continued  to  fall,  and  it  only  circulates  at 
its  nominal  value  because  the  Government  receives  it  at  the  equivalent  of 
gold  at  the  custom  house  and  tax  office. 


158  MONEY. 

have  subsidiary  coin  in  the  form  of  fractional  currency,  consist- 
ing of  copper  and  nickel.  These  are  redeemable  by  the  govern- 
ment in  gold  when  presented  in  sums  of  twenty  dollars  or  more. 
Paper  money  consists  of  printed  promises  to  pay  a  given 
sum  of  money  to  the  holder  on  demand.    It  is  the  government's 

promise  to  pay.  It  is  not  money,  in  reality,  but 
Paper  Money        represents  money,   and  circulates  instead  of  the 

actual  coin.  We  call  it  money  because  it  circulates 
from  hand  to  hand  and  performs  some  of  the  functions  of 
money,  and  because  it  will  purchase  our  wants  the  same  as 
money.  It  is  redeemable  or  convertible  into  actual  money  on 
demand,  and  is  issued  either  directly  by  the  government  or  by 
banks  under  the  authority  of  the  government.  There  are 
several  important  advantages  in  favor  of  the  use  of  paper  money. 
It  is  lighter  than  coin  and  hence  more  convenient  to  carry  in 
the  pocket.  Coin  loses  by  abrasion,  but  paper  can  be  readily 
replaced  with  new.  Paper  money  can  be  sent  through  the  mails 
or  transported  by  express  much  more  easily  than  coin. 

Paper  money  may  be  divided  into  two  kinds,  distinguished 
on  account  of  the  origin  of  each,  viz..  Fiat  Money  and  Eepresenta- 
tive  money.    These  may  be  further  subdivided  as  follows: 

f  Greenbacks 


'  Fiat 

•<  Treasury  Notes 

Paper 

(  National  Bank  Bills 

Money 

j  Gold  Certificates 
(  Silver  Certificates 

^  Eepresentative 

Fiat  money  consists  of  promises  to  pay  by  the  government 
direct,  or  by  banks  under  authority  and  control  of  the  govern- 
ment, founded  upon  the  faith  of  the  people  in  the 
Fiat  Money  stability   and    credit   of   the   government.      Such 

bills  are  issued  under  a  special  law  which  limits 
the  quantity,  pledges  the  government  to  redeem  them  in  gold 
on  demand,  and  provides  for  a  sufficient  reserve  fund  of  gold 
coin,  to  be  kept  on  hand  to  redeem  the  bills  in  circulation. 


GRESHAM'S    LAW.  159 

The  advantages  of  fiat  money  are  that  it  enables  a  nation 
to  increase  its  circulating  medium  rapidly,  or  temporarily,  with- 
out increasing  its  stock  of  precious  metals.  The  increase  in  the 
volume  of  coin  must  necessarily  be  made  slowly,  as  the  metal  is 
mined  and  coined,  but  the  demands  of  trade  or  the  exigencies  of 
war  may  require  an  increase  iii  the  volume  of  the  money  of  the 
country  to  be  made  quickly.  ^..Now  it  has  been  found  by  experi- 
ence that  where  public  confidence  in  the  government  remains 
unshaken,  a  reserve  of  one  dollar  in  coin  is  a  sufficient  deposit 
to  maintain  a  circulation  of  three  dollars  in  paper,  on  the  prin- 
ciple that  all  the  bills  will  not  be  presented  for  redemption  at 
one  time. 

From  the  foregoing  it  must  not  be  inferred  that  the  govern- 
ment can  create  value  or  make  as  much  money  as  it  chooses. 
Government  "^^^  govcmment  Can  no  more  create  value  than  it 
Cannot  Create  cau  crcatc  gold  or  coiu.  It  may  say  how  many 
^^'"^  grains  of  gold  shall  constitute  a  dollar    or    how 

many  pounds  shall  constitute  a  bushel  of  corn.  It  may  decree 
that  a  quantity  of  gold  coin  or  bullion  shall  be  deposited  in  the 
national  treasury  and  it  can,  within  certain  limits,  issue  its  paper 
promises  to  pay,  representing  this  real  money,  but  this  is  the 
extent  of  its  power.  If  it  exceeds  this  limit,  and  at  times  there 
have  been  strong  temptations  to  do  so,  the  result  is  inflation. 
The  money  begins  to  depreciate  and  falls  below  par.  It  circu- 
lates only  at  a  discount,  and  cannot  be  exchanged  for  real  money 
except  at  a  loss.  The  people  lose  faith  in  it.  Gold  is  driven  out 
of  circulation  by  it,  because,  according  to  the  law  of  values 
announced  by  Sir  Thomas  Gresham  three  centuries  ago,  called 
^'Gresham's  Law,"  the  cheaper  money  always  drives  out  the 
dearer,  people  preferring  to  pay  their  debts  with  the  cheapest 
money  which  their  creditors  can  be  induced,  or  by  law  compelled, 
to  accept. 

As  seen  from  the  foregoing,  fiat  money  may  be  redeemable 
in  coin,  that  is,  it  may  be  "convertible"  into  gold  at  the  will  of 


160  MONEY. 

the  holder,  or  it  may  be  founded  only  on  the  faith  of  the  people 
in  the  stability  of  their  government,  or  "inconvertible."  The 
Convertible  former  is  a  convenience  and  aid  to  commerce,  be- 

and  inconvert-  caiisc  it  increases  the  circulating  medium  without 
ibie  Notes  impairing    its    stability.       The  latter  is  inflation 

and  brings  in  its  train  serious  financial  and  industrial  dangers. 
Representative  money  consists  of  certificates  of  deposit  issued 
by  the  government  for  gold  or  silver  deposited  in  the  treasury. 

These  certificates  circulate  as  money  instead  of  the 
Mon'ey*"**^*^*'      ^^^°  which  they  represent.     The  coin  can  be  had 

by  the  holder  of  the  certificate  upon  demand.  The 
representative  money  of  the  United  States  consists  of  gold  cer- 
tificates and  silver  certificates.  The  theoretical  difference  be- 
tween these  and  greenbacks  or  treasury  notes  is  that  the  latter  is 
issued  in  excess  of  the  redemption  fund  on  which  they  are  based, 
while  gold  and  silver  certificates  can  never  exceed  in  amount 
the  coin  on  deposit. 


CHAPTER  XVI. 

THEORIES    OP    MONEY. 

COINAGE;    VOLUME    OF    MONEY;    SUBSTITUTES;    MONOMETALLISM; 
BI-METALLISM. 

Coinage  is  the  process  of  manufacturing  bullion  into  money 
of  proper  form,  weight  and  fineness.  This  is  done  only  by  the 
government,  at  its  mints.  Private  individuals  are  not  permitted 
to  coin  money,  owing  to  the  inducement  which 
FuncriorT"^^'^'  would  cxist  foF  the  practice  of  fraud  and  the  ease 
with  which  it  could  be  practiced.  In  ancient  times 
kings  (notably  Henry  VIII,  the  first  Defender  of  the  Faith) 
debased  the  coin  of  the  realm  and  thus  cheated  their  subjects 
to  enrich  themselves,  but  in  modern  times  money  is  as  accurately 
coined  as  human  skill  is  capable. 

Gold  and  silver  circulate  between  different  countries  by 
weight,  simply  as  merchandise,  the  risk  of  being  defrauded  by 
inferior  quality  or  adulteration  being  left  entirely  to  the  receiver 
of  the  metals,  but  in  domestic  commerce  the  majority  of  people 
have  not  the  skill  nor  facilities  for  weighing  or  determining  the 
value  of  coin  received  in  every  transaction,  hence  the  enormous 
convenience  to  have  each  coin  certified  as  of  proper  weight  and 
fineness  by  the  highest  authority. 

Within  the  sphere  of  the  subject  of  coinage  Congress  must: 
1.  Fix  upon  the  metal  to  be  the  standard  of  legal  money.  2.  Es- 
Dutiesof  tablish  a  unit  of  value.     3.  Fix  the  weight  and 

Congress  as  fincucss  of  the  uuit  and  of  other  pieces,  its  frac- 
to  Coinage  tious   and  multiples.     4.  Choose   proper  inscrip- 

tions for  the  various  coins.  5.  Determine  the  weight,  fineness 
and  value  of  all  coins  of  other  metals  used  as  money,  compared 
with  the  standard.  6.  Decree  how  much  money  shall  be  coined. 
In  passing  upon  these  questions  at  different  times,  our  Congress 

161 


162  MONEY. 

has  finally  established  gold  as  the  standard,  one  dollar  as  the 
unit,  25.8  grains  as  the  weight,  and  nine-tenths  pure  as  the 
fineness,  and  made  its  coinage  free  and  unlimited;  that  is  to 
say,  all  who  bring  gold  bullion  can  have  it  coined  by  paying  the 
mint  charge,  or  seigniorage.  Congress  has  decreed  that  a  silver 
dollar  shall  consist  of  412J  grains  of  silver  nine-tenths  pure, 
and  that  its  coinage  shall  be  restricted.* 

It  is  customary  to  attribute  most  of  our  financial  ills,  such 
as  depression  in  trade,  "hard  times,"  lack  of  employment  and 

low  prices  to  a  scarcity  of  money,  and  to  believe 
Money^  ^^^^  relief  lies  in  starting  the  mints  to  work  or 

the  printing  presses  to  turning  out  bills.  With  a 
desire  to  be  useful  to  their  constituents  our  legislators  often 
undertake  to  cure  the  afflictions  and  poverty  of  the  people  by 
tampering  with  natural  laws  in  the  financial  world,  with  the 
result,  however,  that  they  only  aggravate  the  difficulty.  The 
question  then  properly  rises,  how  much  money  does  a  nation 
really  need?  To  answer  this  is  exceedingly  difficult,  since  a  num- 
ber of  elements  enter  into  the  problem,  some  of  which  are  very 
difficult  to  ascertain.  First  of  all,  the  volume  of  money  which 
a  nation  needs  will  depend  upon  the  size  of  i^s  population,  since 
the  greater  the  number  of  persons  engaged  in  trade  the  greater 
the  amount  of  money  required  to  conduct  that  trade.  Then 
again  the  amount  of  money  must  depend  to  a  considerable  extent 
on  the  commercial  activity  of  the  people.  A  highly  organized 
nation  will  require  more  money  per  capita  than  one  of  fewer 
activities.  The  more  business  done,  goods  manufactured,  bought 
and  sold,  the  more  money  a  people  will  require  as  an  instrument 
of  trade  and  commerce.  The  value  of  the  goods  also  will  affect 
the  question,  and  the  higher  the  price  of  the  goods  the  more 
value  changes  hands,  and  hence  the  more  money  will  be  required 
to    represent    that    value    and    affect    its    changes.      Now    the 


*At  this  point  let  the  student   ascertain  what  amount  of  silver  is  now 
being  coined  and  under  what  restrictions. 


VOLUME    OF    MONEY.  163 

amount  of  a  nation's  foreign  commerce  is  easily  ascertained 
since  it  must  pass  through  the  ports  of  entry,  but  the  volume 
of  inland  traffic,  the  innumerable  transactions  carried  on  be- 
tween citizens  of  the  same  country  (and  this  is  by  far  the  larger 
part  of  a  nation's  commerce)  cannot  be  estimated  accurately. 
Hence  some  of  the  data  which  enters  into  the  question  of  the 
volume  of  a  nation's  money  cannot  be  supplied. 

It  is  also  apparent  that  the  rapidity  with  which  money  cir- 
culates has  an  important  bearing  upon  the  question  of  volume. 
A  "nimble  penny"  will  do  more  business  than  a 
cfrcuiation  sluggish  dime.    A  dollar  which  changes  hands  ten 

times  serves  as  a  medium  of  exchange  equal  to  ten 
dollars  in  one  exchange.  In  these  days  of  quick  transportation 
of  goods  and  rapid  interchange  of  commodities  and  information 
among  the  people,  the  volume  of  money  would  necessarily  need 
be  very  large  were  it  not  for  the  substitutes  which  have  been 
devised  to  take  its  place. 

The  substitutes  for  money  in  a  modern,  highly  civilized 
nation  are  checks,  drafts,  money  orders,  certificates  of  deposit 
and  promissory  notes.  These  are  representatives  of  money,  and 
by  their  use  an  immense  volume  of  business  is 
M^on^ey  "**^  *°*'  transacted  without  the  handling  of  any  real  money. 
The  general  intelligence  of  the  people  by  means 
of  which  they  are  able  to  properly  and  safely  use  the  various 
forms  of  business  papers,  an  extensive  banking  system  by  which 
every  town  of  any  importance  is  provided  with  banking  facili- 
ties, the  bank  clearing  houses  in  all  of  our  large  cities  whereby 
the  exchanges  between  banks  are  effected  with  the  use  of  but 
a  very  small  fraction  of  actual  money — all  these,  the  machinery 
of  finance — combine  to  reduce  the  need  for  a  large  volume  of 
the  circulating  medium. 

The  average  daily  transactions  in  the  Bank  Clearing  House 
of  London  is  £34,000,000  which  if  paid  in  gold  coin  would 
weigh  about  364  tons,  and  would  require  fifty  heavy,  two-horse 


164  MONEY. 

drays  to  transport  it.  If  paid  in  silver  it  would  weigh  5,150 
tons.  The  clearings  in  the  New  York  Clearing  House  average 
daily  about  $250,000,000,  and  yet  this  vast  volume  of  trans- 
actions is  settled  by  the  use  of  less  than  5  per  cent,  of  the 
amount  in  actual  coin  or  legal  tender  notes,  and  even  this 
amount,  except  for  sums  less  than  $5,000,  is  often  paid  by  means 
of  clearing  house  certificates. 

When  business  is  prosperous,  that  is  when  a  large  volume  of 
sales  are  made  or  goods  manufactured,  so  that  a  greater  quantity 

of  money  is  required  to  carry  on  the  commerce  of 
Self-Regulating     the  country,  gold  is  attracted  from  abroad,  and 

like  other  commodities,  seeks  the  place  of  strongest 
demand.  Like  water,  it  seeks  its  level.  On  the  contrary,  the 
history  of  the  past  teaches  us  that  when  trade  slackens  and  a 
smaller  volume  of  the  circulating  medium  only  is  required,  if 
the  several  kinds  of  money  are  founded  on  gold  as  a  standard, 
or  are  redeemable  in  gold,  there  will  be  an  outflow  of  gold  until 
the  excess  is  relieved.  But  if  on  the  other  hand  the  circulating 
mediums  are  not  upon  a  gold  basis  but  are  in  the  nature  of  fiat 
money,  there  will  be  a  general  depreciation  of  the  whole  volume 
of  the  currency.  Thus  the  law  of  supply  and  demand  affects 
to  a  certain  extent  the  quantity  as  well  as  the  value  of  a  nation's 
money.  Then  again  the  volume  of  money  in  circulation  affects 
the  prices  of  all  other  commodities.  A  scarcity  of  gold  means 
low  prices  of  all  commodities  measured  by  gold,  because  the 
scarcity  of  any  commodity  makes  it  dearer,  and  the  dearer  gold 
is  the  greater  its  purchasing  power — the  more  things  it  will  buy. 
And  the  more  plentiful  gold  is,  or  other  money  equivalent  to 
or  redeemable  in  gold,  the  lower  will  be  the  prices  of  all  other 
commodities,  because  money  w411  be  cheaper,  and  will  purchase 
less.  Fluctuations  to  any  considerable  extent  in  the  volume  and 
value  of  the  money  of  a  country,  especially  if  sudden,  must 
necessarily  be  very  injurious  to  the  welfare  of  the  people,  because 
they  unsettle  values  and  make  the  future  of  time  contracts 
uncertain. 


MONOMETALLISM.  165 

From  the  foregoing  we  may  conclude  that  the  volume  of  a 
nation's  currency  is  not  necessarily  a  measure  of  its  wealth, 
and  that  the  wisest  and  safest  method  of  regulating  the  amount 
of  money  in  circulation  is  to  leave  it  perfectly  free  to  follow  the 
inevitable  laws  of  supply  and  demand.  As  a  nation  grows 
older  its  laws  more  stable,  wise  and  just,  it  will  attract  money 
from  other  nations,  as  well  as  add  to  its  supply  by  the  product 
of  the  mines,  and  its  volume  of  money  gradually  increases  to 
meet  the  requirements,  the  same  as  the  amount  of  wheat  or 
cotton  raised. 

Monometallism  consists  in  fixing  upon  a  single  metal  as  the 
standard  of  value.  The  two  metals  chiefly  used  as  money  are 
gold  and  silver.  Of  these  silver  is  more  widely 
Monometallism  and  plentifully  distributed  than  gold.  It  is  usually 
formed  in  larger  deposits  and  is  more  easily  mined, 
hence  its  value  is  much  less  than  that  of  gold.  If  the  relative 
commercial  values  of  the  two  metals  would  always  continue 
precisely  the  same,  the  government  could  ascertain  that  value 
and  fix  the  legal  ratio  accordingly,  but  the  production  of  the 
two  metals  does  not  continue  uniform,  and  hence  their  values 
are  subject  to  change.  An  increase  in  the  output  of  silver  or  a 
decrease  in  the  production  of  gold,  or  vice  versa,  causes  the  com- 
mercial values  of  the  two  metals  to  fluctuate  and  thus  change  the 
actual  or  commercial  ratio  between  them.  Now,  according  to 
Gresham's  Law,  as  before  explained,  when  two  metals  are  legal 
tender,  and  one  is  cheaper  than  the  other,  the  cheaper  invariably 
drives  the  dearer  out  of  circulation,  because  a  debtor  Avill  always 
pay  in  the  cheapest  coin  which  his  creditor  is  compelled  by  law 
to  receive. 

From  the  establishment  of  our  coinage  system  in  1792  until 
1873  gold  and  silver  were  both  legal  standards  of  value,  coined 
in  unlimited  quantities.  The  ratio  from  1792  to  1834  was  15 
to  1,  but  since  the  commercial  value  of  silver  was  slightly  below 
this  ratio,  gold  was  gradually  driven  out  of  circulation  and  so 


166  M0N1S1?. 

continued  almost  without  interruption  until  in  1834.  In  1820 
Mr.  Raguet  wrote  to  the  "National  Gazette"  to  explain  the  reason 
for  "the  disappearance  of  gold  from  the  United  States/'  Two 
years  later  he  wrote  on  the  same  subject,  saying  that  "although 
the  coinage  of  gold  continued  to  he  large  ($1,319,030  in  1820) 
not  a  gold  coin  was  anywhere  to  be  seen  in  circulation."  The 
gold  was  exported  as  fast  as  the  mint  turned  it  out  with  its 
weight  and  fineness  fixed.  To  change  this  state  of  affairs  Con- 
gress in  1834  changed  the  ratio  to  16  to  1.  This  ratio  over- 
valued gold  and  thence  it  became  the  cheaper  money.  Silver 
was  driven  from  our  shores,  and  fractional  coin  was  kept  in  cir- 
culation only  by  making  the  half  dollar,  quarter  dollar  and 
dimes  short  in  weight.  In  1873  silver  was  demonetized,  leaving 
gold  as  the  sole  standard,  and  reducing  silver  to  the  position  of 
subsidiary  coin.  In  this  capacity  it  now  circulates  with  gold. 
The  argument  of  the  monometallists  is  that  in  no  other  way  can 
both  metals  be  kept  in  circulation  than  by  making  one  a  standard 
and  the  other  subsidiary  coin.  History  seems  to  support  their 
contention. 

England  adopted  the  gold  standard  for  herself  and  her  colo- 
nies, including  Australia,  in  1816.  Germany  demonetized  silver 
Single  ^"^  ^^'^^^  ^^  ^^^  S^^^  standard  in  1871.     Her  ex- 

standard  ample  was  soon  followed  by  Denmark,  Norway  and 

Nations  Sweden.     The  gold  standard  also  exists  in  Portu- 

gal, Turkey,  Egypt  and  a  few  South  American  states.  The  silver 
standard  prevails  in  Russia  and  Austria  in  Europe;  China,  India, 
Central  America  and  Mexico. 

Bi-metallism  means  the  use  of  two  metals,  gold  and  silver, 
as  standards  of  value.    Those  who  advocate  bi-metallism  contend 

that  there  is  not  sufficient  gold  to  supply  the 
Bi-metallism        mouey  need  of  the  world,  and  that  if  the  gold 

standard  were  universally  adopted  it  would  cause 
a  gold  famine  which  would  be  exceedingly  disastrous  to  the 
financial  welfare.     It  is  further  contended  that  by  placing  the 


MONOMETALLISM   AND   BIMETALLISM.  167 

entire  burden  as  a  standard  of  value  upon  one  metal  the  use  and 
importance  of  that  metal  is  accordingly  augmented  and  its  value 
increased,  causing  a  corresponding  decline  in  the  values  of  all 
other  commodities. 

But  the  strongest  argument  in  favor  of  the  double  standard 
is  that  one  metal  acts  as  a  check  upon  the  fluctuations  of  the 
other.  If  two  metals  are  equal  as  money  standards,  and  one, 
for  instance  gold,  should  rise  in  value,  this  would  bring  the 
cheaper  metal  into  more  active  use,  thereby  relieving  the  pressure 
on  gold,  or  lessening  the  demand  for  it,  and  causing  it  to  fall. 
Likewise  if  silver  should  become  dearer,  gold  would  be  more 
extensively  used  in  making  payments  instead  of  silver,  thus 
bringing  the  two  metals  nearer  an  average  of  value  and  main- 
taining that  uniformity  which  is  so  important  as  a  measure  of 
value.  The  bi-metallists  contend  that  the  uniformity  of  value 
of  our  standard  is  of  far  more  vital  importance  than  having  the 
two  metals  circulate  together,  and  that  the  lack  of  one  metal  in 
circulation  can  be  supplied  by  other  forms  of  money  if  necessary. 
The  question  may  yet  be  regarded  as  an  unsettled  one  among 
nations,  with  the  tendency  principally  in  the  direction  of  the  gold 
standard.  The  countries  now  having  the  double  standard  are 
France,  Italy,  Belgium  and  Switzerland,  constituting  what  is 
known  as  the  "Latin  Union/'  Spain,  Greece,  and  a  few  South 
American  states. 


HISTORY    OF    BANKING, 


CHAPTER  XVII. 

PRIMITIVE     BANKING. 

BANK  OF  VENICE;  AMSTERDAM;  WISSELBANK;  BANK  OP  FRANCE; 
FRENCH  SYSTEM. 

Banking,  as  we  understand  the  term,  had  its  origin  in  the 
Italian  cities  during  the  middle  ages.  Prior  to  that  time  "bank- 
ers" were  merely  money  changers,  who  set  up  their  banks  or 
benches  in  the  streets  or  market  places  of  the  cities  of  the  Orient. 
Money  changers  were  numerous  in  the  cities  of  Greece  and 
Egypt.  They  kept  no  books,  received  no  deposits,  made  no  loans, 
sold  no  drafts  or  bills  of  exchange  and  issued  no  circulating  cur- 
rency, hence  they  scarcely  possessed  any  of  the  real  functions 
of  a  bank.     But  when  prosperity  came  to  the  cities  of  Italy, 

and  their  ships  were  upon  every  sea,  the  merchants 
Bank  of  Venice     fouud  need  for  othcr  and  better  facilities  in  their 

financial  operations,  and  hence  was  gradually  de- 
veloped the  first  banking  institutions.  The  first  bank,  however, 
that  of  Venice,  had  a  peculiar  origin.  It  was  founded  in  1171 
as  a  combined  result  of  governmental  necessity  and  tyranny. 
The  republic  needed  money  to  carry  on  its  wars  with  Genoa, 
and  levied  forced  contributions  upon  the  leading  mercantile 
firms  and  wealthy  citizens,  in  return  for  which  they  were  given 
perpetual  annuities  at  a  fixed  rate  per  annum.  The  payment 
of  this  annual  interest  was  the  means  of  establishing  the  bank, 
and  as  the  annuities  were  often  transferred  from  one  holder  to 
another,  or  passed  by  devise  or  descent  to  heirs,  the  transfer  was 
made  upon  the  books  of  the  bank,  the  same  as  in  the  case  of  the 
transfer  of   the   stock  of  a  corporation   at   the  present   time. 

168 


AMSTERDAM.  169 

Finally,  to  avoid  the  frequent  and  numerous  entries  on  the  books 
of  the  bank,  certificates  payable  to  bearer  were  issued  and  passed 
from  hand  to  hand,  the  same  as  bank  bills  of  the  present  day.  A 
little  later  bills  of  exchange  were  introduced  as  a  means  of 
transmitting  money  safely  through  provinces  where  property 
was  unsafe  from  robbers  and  barbarians,  but  it  was  not  until 
three  hundred  years  later  (1487)  that  the  system  of  banking  thus 
begun  had  developed  to  the  point  of  deposit  banking,  and  the 
issuing  of  circulating  notes  by  this  same  bank.  The  Bank  of 
Venice  played  a  great  part  in  the  commercial  history  of  its  time, 
proving  a  vast  aid  to  both  the  government  and  the  mercantile 
houses,  and  yet  it  answered  very  imperfectly  the  modern  defini- 
tion of  a  bank. 

During  the  sixteenth  and  seventeenth  centuries  the  commerce 
of  Holland  supplanted  that  of  the  Italian  cities,  and  Dutch  ships 
were  carrying  the  produce  of  the  world.  Amsterdam  then 
became  a  commercial  and  financial  center.  For  a  time  the  com- 
merce of  the  world  seemed  to  focus  there.  Foreigners  came  to 
buy,  and  found  the  products  from  all  parts  of  Europe,  Asia 
and  the  East  Indies,  carried  thither  in  Dutch  ships.  Money 
Amsterdam  as  Aowcd  iuto  Amsterdam  from  foreign  countries  in 
a  Financial  payment  f  or  goods  and  shipping  charges,  and  this 

stream  of  payments  made  it  convenient  to  settle 
in  Amsterdam  the  financial  transactions  of  other  cities,  such 
as  Antwerp  and  Eotterdam.  Thus  Amsterdam  became  a  com- 
mercial clearing  house  for  the  world's  commerce,  the  same  as 
London  and  New  York  are  at  the  present  time.  Bills  of  ex- 
change came  into  Amsterdam  for  collection,  and  the  volume  of 
financial  transactions  rose  to  a  large  figure.  Such  a  concentra- 
tion of  dealings  in  money  could  not  fail  to  develop  a  convenient 
system  of  banking.  "Individuals  began  to  deal  in  foreign  ex- 
change and  to  buy  and  sell  coin  and  bullion;  and,  sometimes  in 
connection  with  the  exchange  business,  and  sometimes  inde- 
pendently of  it,  began  to  receive  money  on  deposit,  and  to  effect 


m  HISTORY    OF    BANKING. 

payments,  when  ordered  by  customers,  by  transfer  from  one 
account  to  another."  Thus  the  business  of  banking  gradually 
developed  to  meet  the  requirements  of  commerce  until  by  the 
middle  of  the  seventeenth  century  it  is  probable  that  many  of 
the  functions  exercised  by  a  modern  bank  were  in  use,  except 
the  issuing  of  a  circulating  currency. 

A  great  variety  of  coins  were  in  use  in  the  different  Dutch 
provinces,  and  to  these  was  added  the  influx  of  gold  and  silver 
Establishment  of  various  Weights  and  values  from  other  nations 
Amst*eSim°*  ^^  ^^^  regular  course  of  foreign  commerce.  The 
X609  rixdaler  was  the  standard  of  value,  but  a  large 

portion  of  the  coins  in  circulation  was  light  in  weight,  either 
from  abrasion,  clipping  or  debasement.  Kings  were  accustomed 
to  debase  the  coinage  in  order  to  replenish  the  public  revenues. 
As  a  consequence  the  coins  of  full  weight  disappeared  con- 
stantly, leaving  the  inferior  pieces  in  circulation.  Instead  of 
attempting  to  regulate  the  coinage  itself,  the  city  fathers  of  Am- 
sterdam ascribed  the  confusion  in  the  circulating  medium  to 
the  free  banking  privileges  which  prevailed,  and  attempted  to 
correct  the  evil  by  regulating  the  dealings  of  private  bankers. 
Their  first  law  was  leveled  against  deposit  banking,  and  by  the 
act  of  July,  1608,  deposit  holding  was  absolutely  prohibited,  and 
the  receiving  or  paying  out  of  money  for  another  person,  or  its 
transfer  by  writing,  "or  by  word  of  mouth,  directly  or  indirect- 
ly" was  forbidden.  The  use  of  bills  of  exchange  was  also  strictly 
forbidden.  The  culling  of  coin,  or  selecting  the  heavy  coin 
from  the  light  was  also  strictly  forbidden.  Thus  did  these  ancient 
law  makers  display  their  ignorance  of  the  laws  of  trade  and 
finance,  and  while  attempting  to  correct  evils  which  they  did 
not  understand,  only  served  to  retard  the  wheels  of  commerce. 
Finally  they  decided  to  create  a  great  financial  institution,  which 
should  concentrate  under  public  authority  the  business  of  receiv- 
ing deposits  and  dealing  in  specie,  and  as  a  result,  in  1609,  was 
established  the  Bank  of  Amsterdam,  more  properly  called  the 


WISSELBANK.  171 

Amsterdam  Wisselbank  (i.  e.  Amsterdam  Exchange  Bank).  The 
bank  created  several  agencies  or  branches  in  different  parts  of  the 
city,  and  thus,  under  the  law,  monopolized  the  business  of  blink- 
ing and  dealing  in  money  and  exchange. 

The  advantages  offered  by  the  Wisselbank  to  the  commercial 
world,  of  which  Amsterdam  was  the  center,  were  security  for 
deposits  and  a  uniform  value  in  its  transfers;  and  while  the 
multitude  of  debased  coins  continued  to  circulate  in  the  chan- 
nels of  trade  the  same  as  before,  the  deposits  in  the  bank  were 
a  standard  of  value.     The  bank  received  only  money  of  full 

weight  and  paid  out  only  such,  hence  a  credit 
the^Ban!f ^'^  °       upou  its  books  was  equivalent  to  so  much  good 

coin.  Credits  in  the  bank  were  frequently  trans- 
ferred, and  came  to  be  called  "bank  money."  Payments  made 
in  "bank  money"  were  preferable  to  payments  made  in  "current 
money,"  owing  to  the  established  value  of  the  former.  Such 
payments  or  transfers  were  made  by  means  of  orders  required 
to  be  presented  by  the  payee  in  person,  or  his  authorized  agent, 
but  the  payee  did  not  receive  the  credit  for  the  transfer  until 
the  following  day.  This  is  the  first  exemplification  of  the 
check  system,  but  it  fell  far  short  of  its  modern  uses.  Even  this, 
however,  was  a  great  convenience  to  the  commercial  public. 
The  law  required  that  all  Bills  of  Exchange  payable  in  Amster- 
dam should  be  settled  for  by  transfers  in  the  bank,  and  this  had 
the  advantage  of  assuring  foreign  holders  that  exchanges  on 
Amsterdam  would  be  paid  in  standard  money,  thereby  giving 
stability  and  uniformity  to  exchanges  and  encouraging  foreign 
trade. 

Every  merchant  was  obliged  to  keep  an  account  with  the 
bank  in  order  to  pay  his  foreign  bills  of  exchange,  and  once 
having  made  a  deposit  it  was  to  his  advantage  to  continue  it, 
because  the  moment  he  withdrew  his  money  and  mingled  it  with 
the  current  money  in  trade,  from  which  it  was  not  readily 
distinguishable,  it  fell   in  value  to   the  level   of  the  current 


172  HISTORY    OF    BANKING. 

money.     "While  it  remained  in  the  coffers  of  the  bank  its  su- 
periority was  known  and  recognized,  but  when  it  came  into  the 

hands  of  private  individuals,  its  superiority  could 
a  Deposit"  °        not  well  be  ascertained  without  more  trouble  than 

the  difference  was  worth"  (Adam  Smith  in 
Wealth  of  Nations).  The  difference  in  value  between  money  in 
bank  and  current  money  sometimes  reached  as  high  as  nine 
per  cent.,  but  was  usually  about  four  per  cent.,  and  this  (called 
the  agio)  the  depositor  lost  by  withdrawing  his  deposit. 

In  1683  the  bank  established  a  system  of  making  advances 
Upon  deposits  of  coin.  Under  this  system  a  depositor  was 
allowed  to  withdraw  an  amount  of  bank  money  not  far  from 
the  value  of  the  specie,  and  upon  this  he  was  charged  interest. 
These  advances  were  commonly  made  for  a  period  of  six  months, 
and  in  ease  the  borrower  failed  to  renew  or  pay  the  loan  at 
maturity,  the  margin  of  his  deposit  over  and  above  the  amount 

of  his  withdrawal  was  forfeited  to  the  bank.    The 

Advances  on  -i        •  p      j  •      j  -j 

Deposits  business  ol  advances  upon  specie  deposits  grew  m 

the  eighteenth  century  to  an  enormous  volume, 
and  completely  superseded  the  earlier  practice  of  simple  deposit. 
Then  the  administrator  of  the  bank  began  to  permit  individuals 
at  times  to  transfer  more  bank  money  than  their  deposits  of 
specie  warranted,  which  was  equivalent  to  giving  permission  to 
overdraw. 

Mismanagement  and  a  diminishing  commerce  are  the  causes 
which,  after  two  hundred  years  of  useful  services,  led  to  the 
decline  of  the  Wisselbank.  Wars  and  the  growth  of  manufact- 
ures had  changed  the  channels  of  trade,  and  Dutch  ships  no 
longer  possessed  a  monopoly  of  the  carrying  business.  The 
center  of  the  financial  world  moved  westward  to 
Q^     *  London,  and  the  Bank  of  England  was  coming 

into  prominence  as  a  great  financial  agent.  Be- 
sides there  had  come  about  a  desire  for  an  improvement  in 
the  system  and  methods  of  bankins^  to   conform  more  to  the 


BANK    OF    FRANCE.  173 

requirements  of  commerce,  a  larger  scope  in  bank  functions, 
and  the  Bank  of  England  was  more  in  conformity  with  this 
idea.  The  Wisselbank  was  finally  dissolved  and  went  out  of 
business  in  1819.  The  present  Bank  of  the  Netherlands,  which 
may  be  considered  its  successor,  was  founded  in  1814  with 
authority  to  make  loans  upon  commercial  paper  and  other  public 
securities.  It  is  also  the  bank  of  issue  of  the  currency  of  the 
Netherlands,  and  keeps  the  funds  of  the  state  and  the  cash  of 
the  postal  savings  banks.  There  is  no  limit  upon  the  circulation 
of  the  bank,  but  the  law  requires  that  it  must  be  secured  by  a 
reserve  of  two-fifths  of  the  aggregate  of  the  circulation  and 
demand  liabilities.    This  reserve  consists  chiefly  of  gold. 

The  Bank  of  France  was  established  in  1800,  the  First 
Consul  being  one  of  its  original  stockholders.  In  1803  its  scope 
was  enlarged  and  it  was  endowed  with  the  exclusive  privilege  in 
Paris  of  issuing  circulating  currency,  a  monopoly  which  was 
finally  extended  so  as  to  cover  the  whole  of  France,  and  which 

it  still  enjoys.  In  some  respects  the  bank  is  the 
ofFranM  greatest  of   financial   institutions,   and   enjoys   a 

reputation  for  solidity  at  home  and  abroad.  While 
the  Bank  of  France  is  the  only  one  of  issue,  there  are  numerous 
private  banks  in  Paris  and  scattered  throughout  the  country 
which  do  a  general  deposit,  discount  and  exchange  business. 
The  capital  of  the  bank  is  182,500,000  francs,  and  its  circula- 
tion limit  is  5,000,000,000  francs — the  greatest  of  any  financial 
institution  in  the  world.  While  nominally  a  private  banking 
house,  the  Bank  of  France  is  really  a  semi-official  institution, 
for  the  reason  that,  being  a  monopoly,  its  operations  are  under 
government  control.  The  management  of  the  bank  is  vested  in  a 
board  of  fifteen  regents  and  three  inspectors  or  auditors,  but  the 
governor  and  two  deputy  governors  are  appointed  by  the  Cham- 
ber of  Deputies.  Only  the  200  stockholders  who  hold  the 
largest  number  of  shares  are  allowed  to  attend  the  annual  meet- 
ing and  participate  in  the  election  of  officers.     French  states- 


174  HISTORY    OF    BANKING. 

men  believe  that  private  ownership  of  the  bank  is  an  advantage, 
since  it  and  the  government  have  thus  been  enabled  to  be  of 
assistance  to  each  other  at  various  times,  in  financial  and  politi- 
cal crises.  M.  Thiers  said,  "The  bank  saved  us  because  it  was  not 
a  state  bank,"  by  advances  when  the  government  was  hard 
pressed,  as  in  1871.  On  account  of  its  issue  of  the  circulating 
medium,  the  impression  prevails  among  the  uninformed  people 
of  France  that  the  bank  is  a  government  institution,  and  it  is 
respected  as  such,  but  business  men  know  that  while  this  is  not 
the  case,  the  government  could  not  allow  it  to  fail,  and  that 
behind  it  is  the  fortune  of  the  nation.  The  note  issue  is  regu- 
lated by  law,  and  has  been  gradually  increased  until  it  has 
reached  its  present  enormous  volume. 

The  functions  of  the  bank  as  prescribed  by  law  are:  "To 
issue  bank  notes  payable  on  demand;  to  discount  bankers'  drafts 
and  commercial  bills,  drawn  at  a  fixed  period  not  exceeding 
three  months  and  bearing  the  names  of  business  people  and 
others  well  known  to  be  solvent;  to  collect  bills  remitted  them 
by  private  parties  or  public  establishments;  to  receive  in  account 
current  sums  for  deposit  with  the  bank  by  private  individuals  or 
public  institutions,  and  to  pay  amounts  drawn  to  the  extent  of 
the  funds  deposited;  to  keep  a  record  of  voluntary  deposits  of 

all  securities,  bullion  and  all  kinds  of  gold  and 
the"Bank^°         silver  moucy;  to  make  advances  upon  French  bills 

and  French  securities,  upon  bullion  and  foreign 
coins,  in  accordance  with  a  certain  proportion  fixed  by  law  and 
the  terms  fixed  by  the  statutes  of  the  bank;  and,  finally,  to  deliver 
to  any  person  applying  therefor  orders  from  Paris  to  their  branch 
offices,  and  orders  on  Paris  from  the  branch  offices." 

The  bank  does  an  extensive  business  in  discounting  short 
time  commercial  paper,  according  to  the  above-mentioned  regu- 
lations, but  its  business  in  this  line  is  considerably  hampered 
by  its  rule  which  requires  three  names  to  each  paper.  This 
compels  many  merchants  to  discount  their  paper  through  brokers 


BANK    OF    FRANCE.  175 

or  private  bankers,  who,  after  endorsing  it,  re-discount  it  in  the 
Bank  of  France. 

To  satisfy  the  demand  for  banking  facilities  in  the  provincial ' 
towns  of  France,  the  bank  is  required  to  maintain  in  each 
department  (equivalent  to  a  state)  in  the  republic,  a  branch  with 
a  capital  allotted  to  it  by  the  parent  institution  in  Paris.  These 
branches,  which  now  number  more  than  one  hundred,  are  con- 
ducted under  the  supervision  of  the  head  bank,  and  can  engage  in 
no  operation  with  other  banks  or  with  each  other  without  special 
leave.  Their  business,  even  to  the  rate  of  discount,  is  directed 
in  Paris,  and  not  with  reference  to  local  wants.  The  local 
managers  are  frequently  strangers  sent  from  Paris 
Branch  Banks  and  are  not  in  close  sympathy  with  the  business 
public.  Nevertheless  the  branch  banks  discount 
a  large  amount  of  commercial  paper,  besides  issuing  bills  of 
exchange,  collecting  government  revenues,  stamp  duties,  etc. 

The  note  issues  of  the  Bank  of  France  are  regulated  by  law. 
The  volume  has  been  increased  from  time  to  time  until  now  the 
limit  is  5,000,000,000  francs,  with  an  actual  circulation  of  about 
3,600,000,000.  This  large  circulation  of  the  bank  is,  according 
to  Conant,  in  a  measure  due  to  the  large  quantity  of  silver  in  the 
reserve  of  the  bank.  The  bank  has  made  repeated  and  continu- 
ous attempts  to  force  its  five  franc  pieces  into  general  circulation, 
but  they  constantly  and  persistently  flow  back  to  the  bank,  the 
people  preferring  paper  currency  based  upon  the  gold  and  silver 
reserve  in  the  bank  vaults.  The  circulation  of  the 
Not"s*  *°^  bank  is  divided  into  two  classes,  denominated  as 

"productive"  and  "non-productive."  Notes  issued 
to  meet  the  demands  of  commerce,  and  which  are  secured  by 
discounted  bills,  are  called  productive,  probably  for  the  reason 
that  interest  is  earned,  and  are  subject  to  a  tax  of  50  centimes 
per  1,000  francs,  while  those  issued  against  specie  or  bullion  are 
called  non-productive,  and  pay  a  tax  of  20  centimes  per  1,000 
francs.     As  soon  as  a  bank  note  passes  into  circulation  it  is  a 


176  HISTORY    OF    BANKING. 

legal  tender  for  all  debts,  public  and  private,  so  long  as  the  bank 
maintains  specie  payments.  They  are  guaranteed  by  gold  or 
silver  coin,  by  loans  made  upon  gold  or  silver  bullion,  by  securi- 
ties or  public  funds,  by  loans  made  to  the  government,  or  by 
drafts  discounted  upon  the  terms  prescribed  by  law. 

The  Bank  of  France  has  the  option  of  redeeming  its  notes 
in  either  gold  or  silver,  and  it  does  it  in  whichever  metal  seems 
most  advantageous  at  the  time.  In  case  a  note-holder  desires 
gold  when  silver  is  offered  him,  or  vice  versa,  the  bank  exacts 
a  small  premium,  as  a  compensation  for  paying  in  the  other 
metal.  It  has  been  the  policy  of  the  bank  to  keep  on  hand  a 
large  gold  reserve  and  prevent  the  exportation  of  the  yellow  metal 

as  far  as  possible.  This  has  been  done  by  charging 
of*Notls*'°"         ^  premium  on  gold  for  export.     The  gold  reserve 

in  the  Bank  of  France  is,  in  round  numbers, 
2,500,000,000  francs,  or  about  one-half  the  authorized  limit  of 
circulating  notes.  The  silver  reserve  is  in  the  neighborhood  of 
1,000,000,000  francs.  There  is  no  law  fixing  the  amount  of  coin 
reserve,  or  proportion  of  specie  to  be  held  against  the  notes  in 
circulation.  In  a  time  of  crisis  the  government  can  give  the 
notes  of  the  bank  a  forced  circulation,  in  which  case  the  bank 
would  be  relieved  from  the  necessity  of  redeeming  its  notes  in 
coin. 

The  enormous  volume  of  the  circulating  medium  of  France 
is  necessitated  to  a  considerable  extent  by  the  fact  that  it  is  a 
country  of  small  traders,  as  well  as  small  farmers,  and  the 
minute  division  of  properties  and  enterprises  is  not  favorable 
to  the  use  of  bank  checks  to  the  same  extent  as  in  countries 

where  industries  are  more  consolidated  and  cen- 
MoneT°^  tralized.     Then  again  the  masses  of  the  French 

people  are  not  educated  in  the  use  of  checks,  or 
accustomed  to  their  use  as  we  are,  and  are  conservative  in  their 
habits  in  regard  to  changing  long-established  methods,  and  hence 
adhere  to  the  old  way  of  using  the  actual  coin  or  bank  notes. 


FRENCH    BANKING.  177 

The  French  people,  therefore,  require  a  large  amount  of  cash 
for  the  transaction  of  their  daily  business,  and  accordingly  we 
find  that  France  has  the  largest  volume  of  both  gold  and  silver 
as  well  as  paper  money,  in  proportion  to  the  population,  of  any 
of  the  great  nations. 

The  banking  of  France  is  remarkable  as  an  example  of  the 
free  organization  of  a  financial  system  under  general  laws,  and 
without  those  restrictions  and  provisions  for  the  safety  of  all 
bank  debts,  especially  circulating  notes,  which  in  other  countries 
has  come  to  be  regarded  as  essential  to  a  stable  currency. 
Here  is  a  great  bank  authorized  to  discount  paper,  receive  de- 
posits and  issue  circulating  notes,  but  without  any  special  pro- 
vision for  the  safety  of  one  class  of  liabilities  rather  than  an- 
No  Special  Lia-  o^hcr.  All  liabilities  of  the  bank  are  upon  the 
biiity  for  Note  same  footiug  and  equally  a  charge  upon  its  gen- 
circuiation  ^^^j  ^^^^^g     rpj^^  -^^^^^  ^f  England  existed  in  this 

manner  until  1844,  and  banking  in  the  United  States  was  con- 
ducted under  the  same  condition  up  to  the  period  of  our  National 
Banking  Act,  but  in  both  these  latter  countries  public  opinion 
has  required  important  modifications  in  the  law  for  the  safety 
of  creditors  and  note-holders. 


CHAPTER  XVIII. 

ENGLISH    BANKING. 

BANK   OF   ENGLAND;   PEEL'S   ACT,   1844;   ONE   RESERVE;    BANKING 
AND   ISSUE   DEPARTMENTS. 

After  the  industrial  revolution  which  set  in  during  the  latter 
part  of  the  eighteenth  century,  England  took  first  place,  com- 
mercially, among  the  nations  of  Europe,  and  London  became  the 
financial  capital  and  center  of  her  growing  commerce.  As  the 
trade  of  Amsterdam  declined,  that  of  London  increased,  and  as 
wealth  accumulated,  England  gradually  became  a  creditor  natipn,- 
London  as  loaning  and  investing  extensively  in  various  parts 

a  Financial  of  the  world.    She  is  at  the  present  time  the  great 

creditor  nation  of  the  world,  loaning  through  the 
bankers  of  London  large  sums  to  foreign  governments  and  citi- 
zens. These  loans  and  investments  necessitate  the  return  of  in- 
terest and  dividends  to  the  bankers  of  Lombard  Street,  in  the 
aggregate  amounting  annually  to  many  millions  of  pounds. 
Many  of  the  largest  transactions  in  the  world  are  settled  in 
London,  and  the  world's  supply  of  gold  there  finds  its  natural 
point  of  distribution.  London  has  thus  become,  practically, 
the  center  of  the  exchanges  of  the  world,  and  is  not  inappro- 
priately called  the  "World's  Clearing  House."  Whether  this 
conditon  of  affairs  is  due  to  the  general  westward  course  of  em- 
pire and  commercial  development;  to  the  freedom  of  the  British 
Isles  from  invasion  and  the  ravages  of  war;  to  the  genius  of  the 
people  for  finance  and  commerce;  or  to  the  money  system  and  the 
Bank  of  England  itself,  or  all  of  these  combined,  is  not  easy  to 
determine,  but  there  are  many  Englishmen  who  would  ascribe 
it  chiefly  to  the  Bank  of  England.  Certain  it  is,  that  the 
Bank  of  England  is  the  center  around  which  the  commercial  and 
monetary  systems  of  the  British  Empire  revolve,  and  the  support 

178 


\ 


BANK    OF    ENGLAND.  179 

of  the  whole  fabric.  The  Bank  of  England,  although  a  highly 
privileged  establishment,  is  not  a  government  institution.  It  has 
practically  a  monopoly  of  the  note  issuing  power,  and  its  notes 
are  the  only  legal  tender  currency  of  the  United  Kingdom.  It 
is  the  chief  depository  of  a  government  which  has  no  public 
treasury.  It  keeps  the  registry  of  the  public  debt,  issues  the 
consols  and  pays  the  interest  thereon,  and  yet,  withal,  it  is  only 
a  private  corporation,  subject  to  no  government  inspection  or 
control,  and  managed  by  a  board  of  directors  who  are  alone 
responsible  to  the  stockholders,  the  same  as  in  the  case  of  other 
corporations. 

The  Bank  of  England  was  founded  in  1694  in  very  much  the 
same  manner  as  the  Bank  of  Venice — as  a  result  of  the  financial 
straits  of  the  government.  William  and  Mary  were  in  sore  need 
of  funds  to  prosecute  the  wars  against  Louis  XIV.  Their  treas- 
ury was  empty  and  their  credit  weak.  The  increasing  wealth  of 
the  country  since  Elizabeth's  reign  had  been  the  cause  of  a  large 
number  of  private  banks  springing  up  in  London  and  other  parts 
of  the  realm,  each  issuing  its  own  notes  to  whatever  extent  they 
would  be  accepted  by  the  public.  The  necessity  for  a  great 
central  bank,  similar  to  that  of  Amsterdam  or  the  Italian  cities, 
was  becoming  apparent.  The  government  desired  a  popular 
loan  of  a  million  sterling,  and  William  Patterson,  a  Scotchman, 
crystallized  the  idea  by  proposing  that  Parliament  should  ask  a 
Origin  of  ^^^^  ^y  pubHc  Subscription,  and  in  order  to  make 

the  Bank  of  the  propositiou  attractive,  include  a  grant  of  in- 

Engiand  Corporation,  with  banking  privileges  to  be  enjoyed 

by  the  subscribers  and  their  successors.  In  this  way  £1,200,000 
was  raised  at  eight  per  cent,  interest,  and  the  subscribers  were 
incorporated  as  the  "Governor  and  Company  of  the  Bank  of 
England,"  with  that  amount  as  a  capital. 

The  bank  was  to  have  the  privilege  of  issuing  notes,  keeping 
the  accounts  of  the  public  debt,  and  of  transacting  a  general 
banking  business,  with  almost  a  complete  freedom  from  restraint. 


180  HISTORY    OF    BANKING. 

The  entire  capital  was  loaned  to  the  government  and  thus  the 
bank  had  a  revenue  of  nearly  £100,000  at  the  very  outset  of  its 
career.  It  began  at  once  to  issue  circulating  notes  based  upon 
the  government  securities  which  it  held,  another  productive 
source  of  income.  These  bills,  however,  were  only 
the°Bank^  transferable  by  endorsement,  like  ordinary  promis- 

sory notes,  and  bore  interest — two  conditions 
which  must  have  confined  them  to  a  very  limited  circulation. 
Three  years  later  the  bank  was  compelled  to  suspend  specie 
payment,  and  the  necessities  of  the  government  were  such  that 
in  consideration  of  the  stockholders  advancing  another  million 
pounds  to  the  government  the  bank's  charter  was  modified.  The 
new  charter  authorized  the  issue  of  notes  payable  to  bearer  on 
demand,  thus  laying  the  foundation  for  the  present  system 
of  Bank  of  England  notes.  It  also  gave  the  corporation  a  mo- 
nopoly of  the  banking  business  in  the  kingdom  by  providing 
that  no  other  bank,  or  corporation  in  the  nature  of  a  bank, 
should  be  allowed  to  carry  on  business  in  the  kingdom.  The 
rate  of  interest  on  the  government  loan  was  then  reduced  to  six 
per  cent.  Further  loans  to  the  government  and  corresponding 
additions  to  its  capital  were  afterwards  made  by  the  bank  from 
time  to  time,  until  in  1722  its  capital  stood  at  nearly  nine 
million  pounds,  with  a  handsome  surplus  (called  the  "Rest"), 
which  enabled  its  dividends  to  be  made  uniform.  In  1782  its 
capital  had  risen  to  more  than  eleven  millions  and  a  half,  and 
in  1816  it  had  further  increased  to  £14,553,000,  or  about  $72,- 
000,000,  at  which  figure  it  has  stood  ever  since.  Its  loans  to  the 
government  increased  almost  as  its  capital  enlarged,  but  in  1834 
the  government  paid  about  one-fourth,  reducing  the  total  to 
£11,015,100,  which  is  its  present  amount.  The  interest  has 
been  reduced  from  time  to  time,  until  it  has  reached  the  present 
rate,  2^  per  cent. 

The  monopoly  of  the  Bank  of  England,  dating,  as  has  just 
been  stated,  from  1697,  was  modified  in  1742  so  as  to  permit 


BANK    OF    ENGLAND     NOTES.  181 

partnerships  having  six  persons  or  less  to  issue  circulating  notes, 
and  allow  companies  or  partnerships  of  more  than  six  persons  to 
perform  other  functions  of  a  bank.  Under  this  law  private 
banks  were  formed  and  notes  were  issued  quite  extensively  dur- 
ing the  latter  half  of  the  eighteenth  century.  About  the  year 
1772  the  check  system  was  devised  and  brought  into  use,  and 
proved  such  a  convenience  that  many  of  the  London  banks 
discontinued  the  issue  of  notes.  In  1826,  owing  to  the  general 
Legislation  demand  for  better  banking  facilities  throughout 

Affecting  the  kingdom,  and  the  slowness  of  the  Bank  of 

the  Bank  England    in    establishing    branches.    Parliament 

passed  an  act  giving  to  companies  of  more  than  six  persons  the 
right  of  issuing  notes,  when  established  at  a  greater  distance 
than  sixty-five  miles  from  London,  thus  limiting  the  monopoly  of 
the  Bank  of  England  in  territory.  Then  in  1833  the  law  was 
again  amended  so  as  to  permit  companies  and  partnerships, 
although  composed  of  more  than  six  persons,  to  carry  on  the 
business  of  banking  in  London  or  within  the  sixty-five  mile 
radius,  provided  they  did  not  issue  circulating  notes.  This  act 
was  followed  by  the  formation  of  numerous  joint-stock  banks 
in  London  as  well  as  throughout  neighboring  towns,  and  bank? 
of  issue  began  business  beyond  the  sixty-five  mile  limit.  The 
London  and  Westminster  Joint-Stock  Bank,  one  of  the  leading 
banks  of  London  at  present,  was  founded  at  this  time  (1835). 

Thus  matters  progressed  until  the  accession  of  Sir  Robert 
Peel  to  the  Premiership  of  England,  and  the  question  of  the 
renewal  of  the  bank's  charter  in  1844.  The  panics  of  1811  and 
1825,  and  the  panicky  conditions  in  1837  and  1839,  had  aroused 
much  discussion,  and  public  opinion  was  disposed  to  regard  the 
vicious  note  circulation  which  had  extended  rapid- 
of?844^  ^^^  ^y  ^^^  widely  as  the  cause  of  these  repeated  com- 
mercial crises.  Prior  to  the  act  of  1844  the  law 
made  no  distinction  in  the  bank's  liabilities,  the  resources  being 
held  equally  as  security  for  deposits  and  the  redemption  of  cir- 


182  HISTORY    OF    BANKING. 

culating  notes.  Under  this  state  of  affairs,  if  the  depositors 
demanded  coin  to  such  an  extent  as  to  exhaust  the  reserve  there 
would  be  no  coin  left  for  the  note  holders,  or  vice  versa.  In 
the  panic  of  1825  the  demands  of  depositors  reduced  the  reserve 
to  only  a  little  more  than  a  million  pounds,  while  there  was 
yet  outstanding  note  issues  amounting  to  over  twenty-three  mil- 
lion pounds.  By  the  act  of  1844  Parliament  undertook  to  make 
the  notes  of  the  Bank  of  England  secure  and  limit  the  issue  of 
bank  notes  of  all  other  banks  in  the  realm.  With  a  stable  cur- 
rency redeemable  in  gold,  Sir  Robert  Peel  believed  that  fear  and 
distrust,  the  bases  of  panics,  would  be  banished  from  English 
commerce,  and  panics  would  cease,  and  yet  three  years  after 
the  passage  of  the  act  (1847)  the  country  experienced  a  panic, 
and  ten  years  thereafter  (1857)  one  of  the  greatest  financial 
panics  ever  known  shook  the  English  banking  and  commercial 
world  from  center  to  circumference,  to  be  followed  in  1866  by 
still  a  third  panic  of  intense  severity. 

By  the  act  of  1844  the  bank  was*divided  into  two  depart- 
ments, viz.,  the  banking  department  and  the  issue  department. 
The  former  was  to  perform  the  functions  of  ordinary  banking, 
such  as  receiving  deposits,  discounting  paper,  selling  or  buying 
exchange,  etc.  The  latter  was  charged  with  the  exclusive  issue 
and  redemption  of  circulating  notes.  These  two  departments 
of  the  bank  were  to  be  kept  as  separate  and  distinct  as  though 
they  were  two  independent  corporations.  The  issue  department 
Division  into  ^^^  required  to  hold  either  government  securities 
Two  Depart-  or  coiu  or  bullion  for  all  notes  issued  by  it,  and 
since  the  original  provision  limits  the  amount  of 
the  securities  to  £14,000,000,  it  follows  that  all  notes  issued 
above  that  amount  must  have  an  equivalent  of  coin  or  bullion  in 
the  vaults  of  the  Bank.  Of  the  £14,000,000  in  securities  £11,- 
015,100  due  by  the  British  government  formed  a  part.  The  act 
also  provided  that  the  Bank  might  hold  silver  to  the  extent  of 
one-quarter  of  its  gold,  and  issue  notes  against  such  holdings, 


"PEEL'S    ACT"    OF    1844.  183 

but  this  was  never  done.  By  another  provision  of  the  act, 
should  any  other  bank,  issuing  notes  at  the  time  of  the  passage  of 
the  act,  discontinue  such  issue,  the  Issue  Department  of  the  Bank 
of  England  might  increase  its  holdings  of  securities  to  the  amount 
of  two-thirds  of  the  issue  of  said  retiring  bank,  and  issue  its 
own  notes  against  such  securities.  By  this  means  the  Bank  of 
England  will  eventually  become  the  exclusive  bank  of  issue,  for 
one  by  one  the  joint-stock  banks  discontinue  their  issues,  and 
cannot  resume  them,  the  privilege  passing  directly  to  the  Bank 
of  England. 

The  amount  of  securities  held  by  the  issue  department  against 
which  notes  may  be  issued  by  the  bank  has  been  increased  from 
time  to  time  by  the  discontinuance  of  note  issues  by  other  banks, 
until  it  amounted  in  1900  to  £17,775,000,  and  the  amount  of 
notes  issued  against  gold  coin  or  bullion  on  hand  amounted  to 
£27,116,000,  making  a  total  of  outstanding  circulating  notes 
£44,891,000.  It  will  thus  be  seen  that  the  issue  department  of 
the  bank  is  simply  an  establishment  for  the  exchange  of  notes 
Bank  of  ^°^  bulliou   or  bulliou   for  notes.     Every   Bank 

England  of  England  note  outstanding  is  practically  a  gold 

certificate,  since  the  bank  has  gold  on  hand  to  pay 
on  demand  every  note  that  it  has  put  in  circulation,  except  the 
comparatively  small  portion  of  the  reserve  represented  by  the 
debt,  and  which  is  partially  covered  by  the  bank's  surplus.  These 
notes  are  a  legal  tender,  as  long  as  the  bank  is  able  to  redeem 
them  in  gold.  By  thus  keeping  a  redemption  fund  of  gold  in 
the  bank  vaults  sufficient  to  actually  redeem  the  notes  in  circu- 
lation, the  element  of  credit  is  entirely  taken  out  of  the  circulat- 
ing medium  of  the  United  Kigdom,  and  the  note  holder  knows 
that  he  can  get  its  face  value  in  gold  at  any  moment.  This 
stability  of  the  currency,  it  was  believed  by  the  supporters  of  the 
Peel  Act,  would  banish  all  fear  from  the  minds  of  note  holders 
and  prevent  the  hoarding  of  gold.  Since  the  hoarding  of  money 
through  fear  partially  causes  panics  by  making  loanable  capital 


184  HISTORY    OF    BANKING. 

scarce,  it  was  contended  that  when  the  motive  to  hoard  was 
destroyed  panics  would  cease.*  But  the  panics  of  1847,  1857  and 
1866  were  not  prevented  by  the  stability  of  the  currency,  and 
in  fact  the  panic  of  1866  was  only  allayed  by  the  announcement 
that  the  Bank  of  England  had  authority  from  the  government 
to  issue  notes  in  excess  of  the  redemption  fund  on  hand.  On 
the  worst  day  of  the  panic.  May  11,  1866,  called  "Black  Friday," 
the  bank  found  its  reserve  in  the  Banking  Department  reduced  to 
nearly  £3,000,000  at  the  close  of  business.  That  evening  the 
chancellor  of  the  exchequer  recommended  that  the  bank  act  be 
suspended,  and  this  was  promptly  done  by  the  government.  The 
announcement  on  the  following  morning  that  the  Bank  of  En- 
gland had  authority  to  issue  notes  beyond  the  limit  to  whatever 
extent  was  necessary,  quieted  the  fears  of  the  people,  and  affairs 
returned  to  their  normal  condition. 

Ordinarily  the  banking  department  has  no  power  to  borrow 
of  the  issue  department.  It  may  take  notes  to  the  issue  depart- 
ment and  exchange  them  for  gold  or  vice  versa,  the  same  as 
outside  persons,  but  during  each  of  the  three  panics,  viz.,  1847, 
1857  and  1866,  the  government  suspended  the  bank  act,  and 
permitted  the  banking  department  to  borrow  notes  from  the 
issue  department  without  depositing  gold  in  exchange.  No  doubt 
the  knowledge  of  the  fact  that  this  has  been  done  in  the  past 
and  will  be  done  again  in  case  future  emergencies  require  it, 
will  have  a  strong  tendency  to  prevent  panics  in  future. 

This  suspension  of  the  banking  act  in  case  of  panic  or  great 
emergency  is  the  only  elasticity  of  the  English  currency.t     At 

*Fear  is  not  so  much  a  cause  of  panics  as  one  of  its  pronounced  features, 
and  the  hoarding  of  money  through  fear  intensifies  the  alarm  by  depleting 
the  cash  reserves  in  the  banlis,  and  by  destroying  their  lending  power  for 
the  time  being,  malies  "loanable  capital"  (which  may  be  actual  money,  and 
may  be  only   bank   credit)   scarce. 

tThe  suspensions  of  the  bank  act  under  stress  of  emergencies  show  the 
unsoundness  of  the  theory  or  "principle"  upon  which  it  rests.  Only  a 
currency  based  on  credit  can  have  elasticity.  Credit  can  both  stretch  and 
contract;  money  cannot,  though  its  volume  may  vary  both  actually  and 
relatively  in  any  country,  nor  can  it  be  made  to  respond  automatically  to 
the  needs  of  the  hour. 


BANK    OF    ENGLAND.  185 

all  other  times  there  is  no  expansion  to  it  whatever.  Not  a  note 
can  be  issued  without  the  gold  is  deposited  in  place  of  it,  and 
hence  the  total  volume  of  Bank  of  England  notes  in  circulation 
in  the  kingdom  is  dependent  upon  the  amount  of  gold  in  the 

vaults  of  the  issue  department  of  the  Bank  of  En- 
S^e  cu^en^y        gland.    Then  again,  the  system  has  been  criticised 

on  account  of  the  large  amount  of  gold  which  is 
kept  constantly  locked  up  and  idle,  while  it  is  claimed  that  a 
safe  and  conservative  reserve  could  be  maintained  and  still  re- 
lease several  million  pounds  of  gold  now  in  the  vaults  which 
could  be  turned  into  circulation  and  productive  use.  The  de- 
fenders of  the  system  say  that  the  act  prevents  the  over-issue  of 
notes,  which  would  be  a  greater  injury  than  the  loss  of  the  use 
of  a  portion  of  the  gold  reserve,  and  furthermore  that  the  gold 
is  the  property  of  the  holders  of  the  bank  notes,  who  have  ac- 
cepted the  notes  on  condition  that  they  could  return  them  to  the 
bank  and  receive  gold  for  them  at  any  time.  The  statement  of 
this  department  of  the  bank  May  20,  1903,  was: 

ISSUE  DEPARTMENT. 

^^  ^         X  X     J.  (   Government  debt £11,015,000 

J^f^r  "^^    i   other  securities   7,159,900 

'     ^  (  Gold  coin  and  bullion 33,407,405 

Besides  the  Bank  of  England  notes  there  is  a  large  amount  of 
gold  and  silver  in  circulation  in  the  United  Kingdom,  necessi- 
tated by  the  fact  that  the  Bank  of  England  does  not  issue  notes 
for  less  than  £5.  The  Scotch  banks  are  allowed  to  issue  notes 
for  £1,  and  a  large  portion  of  this  circulation  is  in  small  denomi- 
nations. 

The  sources  of  profit  of  the  issue  department  are  not  exten- 
sive nor  numerous.  The  government  pays  2J  per  cent,  interest 
on  its  debt  (£11,015,100),  and  interest  is  received  on  the  other 
securities  which  the  bank  holds.  In  addition  to  this  the  bank 
makes  a  profit  on  the  purchase  of  foreign  coin  and  bullion 


186  HISTORY    OF    BANKING. 

brought  to  it,  as  it  buys  gold  at  the  legal  price  of  £3.17s.9d.  per 
ounce,  and  turns  it  into  the  mint  at  a  profit  of  IJd.  per  ounce. 
The  bank  also  derives  a  considerable  profit  from  the  destruction 
of  bank  bills.  Any  bill  which  is  not  presented  at  the  bank 
counter  in  forty  years  is  considered  lost  and  credited  to  the  profit 
account. 


»     V 


CHAPTER  XIX. 

ENGLISH    MONEY    SYSTEM. 

BANK   OP    ENGLAND;    IMMENSE    RESPONSIBILITY    AS    KEEPER   OP 
THE   RESERVE;   BANK   RATES;   MANAGEMENT. 

The  banking  department  of  the  Bank  of  England  is  sub- 
stantially the  equivalent  of  an  extensive  banking  house,  with  all 
banking  functions  except  that  of  issue.  It  receives  deposits,  dis- 
counts commercial  paper,  loans  on  collateral  and  buys  and  sells 
exchange  precisely  the  same  as  any  other  bank.  In  addition  to  this 
it  acts  as  the  banker  of  the  government,  in  the  management  and 
payment  of  interest  on  the  public  debt,  the  issue  and  withdrawal 
of  Exchequer  bills  and  bonds,  the  issue  of  government  loans, 
and  all   other  financial   operations   affecting   the   government. 

Like  other  banks  it  must  as  a  matter  of  ordinary 
Depsu'tmenf        prudeucc  keep  on  hand  a  cash  reserve  against  its 

liabilities.  It  is  bound  to  meet  all  its  demand  lia- 
bilities in  cash,  consisting  of  notes  or  coin,  like  other  banks,  and 
if  it  has  need  for  a  greater  quantity  of  notes  than  that  on  hand,  it 
may  procure  them  from  the  issue  department  in  exchange  for 
gold  the  same  as  any  other  bank. 

Every  deposit  bank  must  retain  constantly  on  hand,  or 
within  easy  reach,  a  sum  of  legal  tender  money,  equal  to  a  safe 
and  proper  proportion  of  its  liabilities,  in  order  to  meet  unex- 
pected demands  of  depositors.  This  is  a  universal  rule  the 
world  over,  and  is  based  upon  the  supposition,  which  experience 
has  shown  to  be  generally  true,  that  all  depositors  will  not  call 
for  their  deposits  at  the  same  time,  but  under  disturbed  con- 
ditions, an  unusual  number  may  make  such  demands,  and  the 
bank  must  at  all  times  be  in  readiness  to  meet  such  calls.    This 

187 


188  HISTORY    OF    BANKING. 

reserve  is  the  safety  fund  over  and  above  the  daily  requirements 
of  cash  to  transact  the  ordinary  volume  of  business,  held  by  the 

bank  to  meet  extraordinary  and  infrequent  de- 
Reserve  mands.     The  banks  all  over  England  keep  their 

reserves  in  London.  The  same  reasons  which  in- 
duce a  merchant  to  keep  a  bank  account,  viz.,  convenience,  safety, 
etc.,  act  as  incentives  to  a  bank  to  deposit  its  reserve  in  whole 
or  in  part  with  another  bank  or  banker.  In  order  to  conduct 
exchange  transactions  and  have  facilities  for  rediscounting  time 
bills,  every  bank  and  banker  in  the  United  Kingdom,  not  located 
in  the  metropolis,  find  it  necessary  to  carry  an  account  with 
some  London  bank  or  banker,  and  as  the  latter,  as  well  as  the 
bill  brokers  of  Lombard  Street,  who  are  really  bankers  under 
another  name,  allow  interest  on  such  deposit  accounts,  the  result 
is  that  practically  all  of  the  reserve  of  the  country  is  carried  in 
these  accounts.  "Owing  to  the  fierce  competition  for  practical 
profits,"*  nowhere  more  severe  than  in  the  field  of  banking,  the 
London  joint-stock  and  private  banks  maintain  no  coin  reserve 
of  their  own,  but  deposit  with  the  Bank  of  England  all  cash 
not  needed  for  ordinary  transactions  from  day  to  day.  The 
Bank  of  England  does  not  pay  interest  upon  these  deposit  ac- 
counts but  the  willingness  of  smaller  banks  to  place  their  re- 
serves in  the  Bank  of  England  is  due  to  the  fact  that  they  are 
relieved  of  the  care  and  risk  of  such  large  sums,  and  by  showing 
their  funds  in  their  balance  sheets  thus  deposited  they  command 
public  confidence.  Another  reason  is  that  the  London  clearing 
house  settlements  are  made  through  the  Bank  of  England,  which 
practically  compels  the  members  of  the  clearing  house  to  keep 
their  reserve  cash  with  that  institution.  The  Scotch  and  Irish 
banks  keep  their  surplus  money  in  London.  A  portion  of  it  is 
loaned  out  or  invested  in  securities  and  the  remainder  deposited 
in  the  Bank  of  England.  It  will  thus  be  seen  at  once  that  the 
Bank  of  England  holds  not  only  its  own  reserve,  but  the  reserve 


*Conant,  Modern  Banks  of  Issue,  p.  130. 


ENGLAND'S    BANK    RESERVE.  189 

of  all  London,  and  not  only  of  all  London  but  of  all  England, 
Ireland  and  Scotland. 

This  great  responsibility  of  the  Bank  of  England  makes  it 
the  basis  of  the  credit  system  of  the  kingdom.  Upon  the  manage- 
ment of  the  Bank  of  England  depends  the  solvency  or  insolvency 
of  England,  for  all  business  is  dependent  upon  the  banks,  and 
all  banks  are  dependent  upon  the  one  great  bank,  "The  Old 
Lady  of  Threadneedle  Street."  While  the  Bank  of  England  is 
Immense  ^  private  corporatiou  carried  on  for  the  benefit  of 

Responsibility  its  stockholders,  who  aloue  share  the  profits  and 
direct  its  management,  it  is  in  a  sense  a  public  in- 
stitution, for  to  it  is  confided  the  safety  of  the  commercial 
public  and  credit  of  the  kingdom,  and  it  is  morally  bound  in 
time  of  stress  to  sustain  the  entire  financial  fabric. 

There  is  no  law  requiring  the  bank  to  maintain  a  stated  re- 
serve in  proportion  to  its  liabilities,  and  since  the  management 
is  expected  to  earn  as  large  dividends  as  possible  for  the  stock- 
holders, the  tendency  would  naturally  be  to  reduce  the  volume 
of  idle  cash  to  the  lowest  point  consistent  with  safety.  Like 
other  banks,  the  Bank  of  England  loans  out  a  portion  of  its 
deposits,  consisting  largely  of  reserves  of  other  banks,  and  the 
effect  of  this  is  to  cause  the  reserve  to  be  much  smaller  in  pro- 
portion to  the  liabilities  of  all  the  banks  than  it  would  be  were 
each  bank  to  hold  its  own  reserve.  But  the  fact  that  under 
the  English  system  the  bank  reserve  is  reduced  to  a  compara- 
tively small  proportion  of  the  liabilities  is  not  the  only  objection 
which  can  be,  and  often  is,  urged  against  it.  This  reserve,  all 
important  as  it  is,  is  given  over  to  one  board  of  directors,  and 
upon  their  wisdom  its  control  depends.  If  they 
One  Reserve  commit  iudiscretions  the  entire  financial  and  com- 
mercial system  may  be  seriously  injured.  Having 
a  smaller  balance  to  meet  liabilities,  any  error  in  the  manage- 
ment of  that  balance  becomes  proportionately  serious. 

The  natural  method  would  appear  to  be  that  each  bank 


190  HISTORY    OP    BANKING. 

should  keep  its  own  reserve.  Each  would  then  be  most  anxious 
to  keep  a  sufficient  reserve,  because  its  own  life  and  existence 
would  depend  upon  it.    The  reserve  of  the  entire  country  would 

then  be  guarded  and  controlled  by  the  total  banking 
Many  Reserves     wisdoui  of  many  boards  of  dircctors,  and  the  loss  of 

interest  occasioned  by  the  amount  of  dead  capital 
locked  up  in  the  banks  as  reserves,  would  be  more  than  offset  by 
the  added  security.  In  no  other  country  than  England  could  the 
one  reserve  system  exist  as  it  does  there.  The  system  was  not 
deliberately  founded  there,  but  grew  up  as  a  consequence  of  many 
events.  As  the  system  grew,  confidence  in  the  bank  also  grew, 
until  the  stability  of  the  bank  is  beyond  question  and  supports 
the  system  of  one  reserve.  It  is  the  absolute  faith  of  the  people 
in  the  stability  of  the  Bank  of  England  that  takes  the  place  of 
a  large  reserve. 

But  the  reserve  in  the  Bank  of  England  is  subject  to  a  still 
further  strain  occasioned  by  the  necessities  of  foreign  commerce. 
London  is  the  center  of  English  commerce,  and  in  case  the 
balance  of  trade*  goes  against  England  and  in  favor  of  any  other 
country,  that  balance  must  be  paid  by  London,  and  this  is 
equivalent  to  saying  that  it  must  be  paid  by  the  Bank  of  En- 
gland. When,  during  our  civil  war,  the  supply  of  cotton  to 
England  by  the  United  States  was  cut  off  and  exports  to  America 
greatly  reduced,  immense  sums  of  money  had  to  be  sent  to 
Australia  and  Egypt  to  pay  for  cotton  to  keep  the  looms  of 
London  the  Manchester  supplied.     Of  course  no  foreigner  can 

Clearing  House  take  away  the  cash  of  England  without  giving  a 
of  the  World  yalue  thercfor,  but  that  value  may  be  in  produce 
or  manufactures,  represented  by  bills  of  exchange  which  the 
foreigner    discounts    in    Lombard    Street,    and    then    he    may 


♦The  phrase  "Balance  of  Trade"  is  usually  taken  to  mean  the  differences 
between  imports  and  exports  of  merchandise,  but  strictly  the  balance  is 
caused  quite  as  often  through  movements  of  capital  in  the  form  of  loans 
or  investments,  as  of  merchandise.  These  movements  not  being  "visible" 
through  tlie  records  of  the  custom  houses,  are  often  very  diflacult  to  follow. 


WOKLD'S    FINANCIAL    CENTER.  191 

take  away  a  part  or  all  of  the  proceeds  of  his  bills  in  bullion. 
No  other  city  in  the  world  cashes  as  many  foreign  drafts  as 
London.  No  other  city  in  the  world  receives  as  many  remit- 
tances or  pays  as  many  drafts  as  London.  No  other  city  holds 
as  much  foreign  money  on  deposit  as  London,  for  wherever  the 
people  have  payments  to  make,  at  that  place  they  must  keep 
money  on  deposit.  Formerly  Paris  was  a  European  clearing 
house  to  a  considerable  extent,  and  divided  the  business  and 
responsibility  with  London,  but  the  changes  in  government  in 
France  have  had  the  effect  of  greatly  reducing  the  confidence  of 
foreigners  in  the  stability  of  the  Bank  of  France,  while  the 
volume  of  mercantile  business  finding  its  natural  settlement  in 
London  compelled  banks  all  over  the  world  to  keep  accounts 
there.  As  it  is  more  convenient  to  keep  one  foreign  account 
than  several,  and  most  convenient  to  keep  this  in  the  city  with 
which  transactions  are  largest  and  most  numerous,  there  was 
thus  placed  upon  merchants  all  over  the  world  the  effective 
pressure  of  more  favorable  exchange  rates  when  bills  could  be 
drawn  upon  and  payments  made  in  London.  Very  large  banks 
can  keep  accounts  in  all  the  European  centers,  but  it  would 
neither  be  profitable  nor  possible  for  small  banks  to  keep  such  ac- 
counts, because  of  the  amount  of  cash  that  would  be  locked  up. 
Moreover  the  most  favorable  terms  can  be  obtained  upon  large 
accounts  only,  and  it  is  a  custom,  the  world  over,  except  in  the 
United  States,  for  banks  to  exact  commissions  on  all  services 
rendered.  These  considerations  have  tended  to  centralize  the 
financial  transactions  in  the  Bank  of  England,*  which  has 
established  a  record  for  stability  and  uniformity  of  dealing 
through  long  generations. 

As  the  commerce  of  a  nation  increases  the  reserve  on  hand 


♦When  the  volume  of  exchanges  on  some  other  city,  New  York,  for  ex- 
ample, becomes  so  great  relatively,  that  banks  the  world  over  find  It  cheaper 
to  effect  settlements  there  rather  than  in  London,  the  prestige  of  London 
must  surely  begin  to  wane.  There  are  other  factors  in  the  case,  however, 
such  as  the  amount  of  free  capital  available  for  discounting  time  bills  of 
exchange,  etc.,  but  the  foregoing  is  the  chief  one. 


192  HISTORY    OF    BANKING. 

to  settle  the  balance  of  that  commerce  must  likewise  increase. 
A  single  bad  harvest  in  any  important  country  with  which 
England  trades,  may  seriously  affect  the  balance  of  trade  with 
England,  by  reducing  the  demand  for  English  manufactures.  A 
sudden  increase  of  imports  or  a  cessation  of  exports  causes  a 
A  Reserve  for  balance  of  trade  to  become  due,  which  must  be  paid 
Foreign  in  bulliou.    Within  a  country,  paper  currency  may 

Payments  ^^  ^^^^  ^^  Settlement  of  obligations,  but  in  inter- 

national trade  the  only  cash  is  metal.  The  Bank  of  England 
must  therefore  keep  a  reserve  which  can  be  used  for  foreign 
payments  either  in  bullion  or  legal  tender  notes  which  can 
be  converted  into  bullion  on  demand  by  passing  them  over  the 
counter  of  the  issue  department.  The  requirements  of  foreign 
commerce  are  often  sudden  and  fluctuating,  and  must  be  met 
promptly.  Therefore  it  is  of  the  greatest  importance  that  the 
reserve  upon  which  this  commerce  depends  should  be  both 
ample  and  ready,  at  all  times,  to  satisfy  the  demands  upon  it. 

Foreseeing  the  need  for  an  increase  in  the  reserve  in  anticipa- 
tion of  large  foreign  payments,  soon  to  be  made,  the  question  at 
once  arises,  "How  are  the  bank  directors  to  secure  the  additional 
bullion?"  They  may  reduce  the  volume  of  discounts,  and  this 
would  in  a  measure  help  to  accomplish  the  purpose,  but  would 
not  afford  a  sufficient  increase  in  the  reserve  to  meet  a  large  or 
continuous  drain  on  the  reserve.  They  may  sell  securities,  but 
in  a  very  large  number  of  instances  this  would  merely  mean  the 
transfer  of  a  credit  from  one  account  to  another  on  the  bank's 
ledger,  as  the  buyer  of  the  securities  would  in  all  probability 
be  an  individual  or  bank  having  a  deposit  account  with  the  Bank 
of  England.    What  then  is  the  means  employed  to  increase  the 

reserve?  The  answer  is,  raising  the  rate  of  dis- 
msLunt  count.     If  the  directors  of  the  Bank  of  England 

vote  to  raise  the  rate  of  discount,  it  is  proved  by 
experience  that  money  flows  to  Lombard  Street  and  from  the 
other  banks  it  flows  to  the  Bank  of  England.    Money  (i.  e.  capi- 


FOREIGN    SETTLEMENTS.  193 

tal)  goes  where  it  is  wanted  most  and  commands  the  highest  rate 
of  interest. 

An  increase  in  the  bank  rate  has  an  immediate  effect  on 
foreign  exchange  transactions,  making  it  unprofitable,  or  tending 
to  make  it  unprofitable,  to  withdraw  gold  for  export,  and  at  the 
some  time  tending  to  make  it  profitable  to  ship  gold  from  other 
financial  centers  to  London.  The  bankers  there  pay  a  higher 
rate  of  interest  and  charge  borrowers  a  higher  rate  of  discount. 
The  effect  of  the  operation  of  raising  the  rate  of  discount  even 
slightly  is  to  swell  the  reserve  in  the  vaults  of  the  Bank  of 
England,  and  at  the  same  time  to  diminish  loans  by  discouraging 
borrowers.  With  money  a  little  "tighter,"  imports  are  dimin- 
ished and  exports  are  increased,  thus  tending  to  change  the  bal- 
ance of  trade  in  England's  favor  and  reduce  the  necessity  for 
large  foreign  payments.  The  raising  and  lowering  of  the  rate 
of  discount  by  the  directors  of  the  Bank  of  England,  then,  acts 
as  a  lever  of  control  to  the  financial  and  commercial  systems  of 
England.  When  the  bank  is  "flooded"  with  money,  and  no 
prospects  are  visible  of  a  drain  upon  the  reserve,  the  rate  of  dis- 
count is  lowered.  Money  now  flows  from  Lombard  Street  into 
other  channels  both  in  England  and  on  the  Continent,  where  it 
can  be  more  profitably  employed;  with  a  lower  rate  of  discount, 
borrowers  are  more  plentiful,  and  more  goods  are  imported. 

Many  persons  believe  that  the  Bank  of  England  has  some 
peculiar  power  which  enables  it  arbitrarily  to  fix  the  rate  of  in- 
terest, whereas  the  truth  is  the  bank  merely  gives  expression  to 
the  market  value  of  money,  as  fixed  by  the  laws  of  supply  and 
demand.  The  value  of  money  is  settled,  like  that  of  all  other 
Effect  of  commodities,  by  the  inexorable  law  of  demand  and 

Supply  and  supply,  and  the  bank  merely  takes  the  lead  in  fix- 

Demand  .^g  ^^  establishing  that  value  in  the  form  of  a 

discount  rate.  If  the  bank  vaults  are  full,  the  bank  lowers  the 
rate  to  attract  borrowers,  the  same  as  a  merchant  lowers  the 
price  of  his  goods  in  order  to  effect  sales  and  reduce  his  stock. 


194  HISTORY    OF    BANKING. 

and  the  contrary  policy  is  pursued  to  increase  the  cash  in  the 
bank  vaults. 

The  government  of  the  Bank  of  England  is  confided  in  a 
board  of  twenty-four  directors,  a  governor  and  a  deputy  gov- 
ernor, who  each  serve  one  year.  In  theory  a  portion  of  the  di- 
rectors go  out  annually,  remain  out  for  a  year  and  are  then 
subject  to  re-election,  but  as  a  matter  of  fact  they  are  nearly 
always  re-elected  at  the  end  of  the  year,  unless  other  members 
of  the  board  oppose.  All  the  directors  in  turn  serve  as  deputy 
governor  and  governor,  in  rotation,  and  it  is  not  until  a  director 
Management  ^^^  ^^^^  ^P°^  ^^^  board  perhaps  twenty  years 
of  the  Bank  that   he    succccds   to    the   position   of   governor. 

of  England  ^Theu  a  vacaucy  occurs  in  the  board  by  death  or 

resignation,  the  directors  usually  select  some  promising  young 
business  man  for  the  place.  In  order  to  reach  the  governorship 
within  the  period  of  a  lifetime,  it  is  necessary  that  new  directors 
should  be  young  men.  The  position  of  director  of  the  Bank  of 
England  is  considered  a  highly  desirable  one,  as  it  gives  a  con- 
siderable status  to  both  the  individual  and  the  house  to  which  he 
belongs.  By  a  long-established  usage  the  directors  cannot  be 
connected  with  any  other  bank,  in  any  official  capacity.  They 
must  be  merchants,  brokers  or  capitalists  of  experience,  and 
men  presumed  to  possess  information  as  to  the  present  and  future 
course  of  trade.  The  reason  for  the  discrimination  against  bank- 
ers as  members  of  the  directory  of  the  Bank  of  England  no  doubt 
arose  out  of  the  narrow-minded  jealousy  of  former  times,  which 
regarded  all  other  banks  as  rivals  to  be  feared  and  opposed. 

In  theory  the  system  of  management  of  the  Bank  of  England 
would  seem  to  be  very  objectionable.  A  governor,  the  chief 
executive  officer  of  the  bank,  allowed  to  hold  the  office  but  one 
year,  a  directory  made  up  of  merchants,  a  portion  of  them  young 
men,  and  not  a  trained  banker  in  the  entire  board,*  would  not  or- 


♦There  is  no  better  school  for  the  education  of  bankers  in  the  larger  lines 
of  their  profession,  in  a  firm  grip  on  guiding  principles  and  a  wide  outlook 
over  the  whole  commercial  and   financial   world,  than  service. on  the  board 


MANAGEMENT.  195 

dinarily  be  regarded  as  a  very  competent  or  safe  board.  Indeed, 
were  such  a  system  of  management  proposed  at  the  present  time 
for  the  conduct  of  a  new  and  important  banking  house  in  En- 
gland or  elsewhere,  it  would  instantly  be  rejected  as  crude  if 
not  absurd.  And  yet  the  Bank  of  England,  which  holds  the 
nation's  reserve,  is  managed  in  this  way.  Banking  is  now  re- 
garded as  a  profession  to  which  men  should  be  trained  by  years 
of  constant  experience  and  familiarity  with  financial  questions. 
And  yet  the  Bank  of  England  has  been  singularly  well  managed. 
Its  directors  have  always  seemed  to  appreciate  the  large  re- 
sponsibility resting  upon  them,  as  managers  of  the  bank  which 
sustains  the  credit  system  of  England,  and  while  at  times  they 
have  erred  in  policy  the  great  institution  stands  to-day  as  solid, 
in  the  estimation  and  confidence  of  the  people,  as  the  government 
itself. 


of  the  Bank  of  England.  As  nearly  all  of  the  board  have  been  many  years 
in  office,  they  are  as  a  lot,  men  of  ripe  experience,  and  as  the  new  men 
are  always  in  the  minority  and  are  constantly  being  educated  by  their  en- 
vironment and  responsibilities,  a  tremendous  force  is  thus  developed  in  the 
line  of  conservative  action.  Technically  they  may  not  be  bankers;  prac- 
tically they  are  very  good  ones. 


CHAPTER  XX. 

GERMAN    BANKING. 

REICHSBANK;    ELASTICITY    OF    GERMAN    CURRENCY;    STABILITY; 
RUSSIAN   BANKING. 

Prior  to  the  unification  of  the  German  Empire  in  1871  each 
state  had  its  own  banking  system,  and  most  of  the  banks  were 
allowed  to  issue  notes  according  to  certain  restrictions  and  upon 
such  bases  as  the  states  and  cities  establishing  them  should 
prescribe.  These  banks  differed  materially  as  to  the  limit  of 
their  authorized  issues,  and  were  bound  to  a  great  variety  of 
restrictions  as  to  their  requirements  of  a  reserve.  Under  this 
German  Bank-  statc  of  affairs  uotcs  wcrc  currcut  only  in  the 
ing  before  the  state  whcrc  they  were  issued,  and  trade  was 
Empire  scriously  hampered  for  want  of  a  stable  and  uni- 

form currency.  The  coinage  law  of  1871  undertook  to  establish  a 
uniform  monetary  system  throughout  the  empire,  and  paved  the 
way  for  the  adoption  of  the  gold  standard  in  1873.  In  1874  a 
law  was  passed  abolishing  the  different  issues  of  paper  money 
then  current  throughout  the  different  states  of  the  empire  and 
substituting  therefor  imperial  bank  notes  convertible  into  gold. 
The  new  currency  was  distributed  to  the  states  to  the  extent 
of  180,000,000  marks.  Finally,  in  1875,  all  banks  of  issue 
throughout  the  empire  were  brought  under  a  uniform  law,  and 
made  a  part  of  the  system  of  imperial  finance,  thereby  greatly 
improving  and  facilitating  trade  and  commerce. 

Under  this  system  the  Bank  of  Prussia  became  the  Imperial 
Bank  of  the  empire,  with  a  near  approach  to  a  monopoly  of  the 
note  issuing  power  and  the  same  system  for  the  gradual  abolition 
of  the  issues  of  other  banks  and  the  final  concentration  of  the 
power  of  issuing  circulating  notes  in  the  Imperial  Bank  as  is 

196 


THE    REICHSBANK.  197 

possessed  by  the  Bank  of  England.    The  capital  of  the  Imperial 
Bank  (Reiehsbank)  is  120,000,000  marks,  divided  into  shares  of 

3,000  marks  each,  and  is  all  owned  by  private  in- 
Reichsbank  dividuals.      Unlike    the    Bank    of   England,    the 

Reiehsbank  is  subject  to  governmental  control.  Its 
affairs  are  managed  by  a  president  and  board  of  directors  named 
by  the  government,  subject  to  the  chancellor  of  the  empire,  or  a 
substitute  named  by  him  who  has  entire  charge  of  the  bank,  and 
directs  its  policy.  The  stockholders  of  the  bank  have  no  voice 
whatever  in  its  management.  They  merely  furnish  the  capital 
and  divide  the  profits  of  the  institution.  As  a  matter  of  fact, 
however,  the  stockholders  do  not  receive  all  of  the  profits.  In 
case  the  net  profits  exceed  3J  per  cent.,  then  the  government 
becomes  a  sharer  in  the  profits  above  that  limit. 

The  German  system  of  note  issues  rests  upon  a  mixed  basis 
of  securities  and  specie,  somewhat  similar  to  that  of  England, 
with  the  important  difference  that  the  law  contents  itself  with 
requiring  the  maintenance  of  this  basis,  without  specially  pledg- 
ing or  setting  apart  specific  coin  or  securities  for  the  purpose, 
as  is  done  by  the  Issue  Department  of  the  Bank  of  England. 
German  currency  is  secured  by  the  salutary  power  of  the  law 

rather  than  by  specific  property,  and  to  make  sure 
Loans*^  °^         ^^  ^^^  obscrvaucc  of  the  law,  all  banks  of  issue 

are  required  to  report  the  condition  of  their  note 
issues  every  week  to  the  chancellor  of  the  empire.  No  precise 
limit  is  fixed  for  the  aggregate  circulation  of  the  notes  of  the 
Reiehsbank  and  other  banks  of  issue,  but  the  total  of  notes  which 
can  be  issued  without  being  covered  by  cash  in  the  vaults  of  the 
banks  is  385,000,000  marks,  of  which  250,000,000  marks  are 
allowed  to  the  Reiehsbank  and  135,000,000  marks  are  appor- 
tioned among  the  other  banks.  For  all  notes  issued  by  any 
bank  beyond  its  limit,  the  government  requires  that  cash  shall 
be  held  to  the  full  amount  of  such  issue,  the  term  "cash"  here 
meaning  German  and  foreign  gold,  bullion,  imperial  treasury 


198  HISTORY    OF    BANKING. 

notes  and  the  notes  of  other  banks.  But  if  any  bank  issues 
notes  beyond  the  limit  and  not  covered  by  cash  a  government 
tax  of  5  per  cent,  is  imposed,  thus  taking  away  the  profit,  and 
hence  the  inducement  to  such  extra  issue.  In  case  the  weekly 
report  of  any  bank  shows  that  its  issue  exceeds  the  limit  as  above 
explained,  a  tax  of  5/48  per  cent,  is  charged,  this  being  the  rate 
for  one  week  at  5  per  cent,  per  annum.  The  law  requires  in 
any  case,  however,  that  the  cash  held,  exclusive  of  the  notes  of 
other  banks,  must  equal  not  less  than  one-third  of  the  total 
note  circulation,  and  that  the  remainder  shall  be  protected  by 
good  assets,  usually  consisting  of  securities  or  discounted  paper 
having  not  more  than  three  months  to  run  and  bearing  two 
solvent  names.  The  note  issues  of  Germany  thus  rest  upon  a 
mixed  basis  of  specie  and  other  assets. 

As  previously  stated,  the  legal  limit  of  note  issue  without 
specie  reserve  may  be  exceeded  upon  payment  of  the  government 
tax  of  5  per  cent..  This  is  an  important  feature  of  the  German 
system,  since  it  gives  an  elasticity  to  the  currency  of  the  empire. 
In  a  time  of  stringency,  the  rate  of  discount  goes 
Se  Currency  above  5  per  ceut.,  and  then  the  banks  can  make  an 
issue  beyond  the  limit,  loan  the  funds  at  the  ruling 
rate  of  discount  and  have  a  profit  left  after  paying  the  govern- 
ment tax  of  5  per  cent.  But  the  moment  the  money  market 
loosens  and  the  rate  of  discount  falls  below  5  per  cent,  the 
banks  can  no  longer  afford  to  loan  out  funds  at  a  rate  which 
is  lower  than  the  tax  which  they  must  pay  to  the  government, 
and  hence  the  extra  circulation  is  retired.  By  this  system  the 
volume  of  the  circulating  medium  adjusts  itself  to  the  needs  of 
the  country.  This  automatic  contraction  and  expansion  has  been 
of  great  benefit  to  the  commercial  interests  of  Germany.  In  this 
way  financial  stringencies  have  several  times  been  relieved  and 
probable  panics  averted. 

The  currency  of  Germany  is  kept  on  a  gold  basis  by  the 
Imperial  Bank,  which  is  required  to  redeem  its  notes  on  demand. 


BANKING    RESERVES.  199 

While  the  notes  are  not  issued  against  a  specific  reserve,  as  in 
the  case  of  the  Bank  of  England,  but  against  the  general  assets  of 
the  bank,  and  are  not  even  a  prior  lien  on  those  assets,  never- 
theless a  sufficient  supply  of  gold  is  carried  in  the  vaults  of  all 
the  issuing  banks  to  place  the  redemption  of  the  notes  beyond 

doubt  in  the  minds  of  the  people.  In  1899  the 
Gold  Basis  total  volumc  of  circulating  notes  outstanding  in 

Germany  amounted  to  1,322,208,000  marks,  and 
the  total  metallic  reserve  held  by  the  eight  banks  issuing  these 
notes  was  911,528,000  or  a  little  less  than  seventy  per  cent. 

Bank  notes  in  Germany  are  not  issued  in  lower  denomina- 
tions than  100  marks,  and  this  restriction  keeps  in  constant 
circulation  a  considerable  quantity  of  specie  for  small  trans- 
actions. The  bank  notes  are  not  a  legal  tender,  but  their  credit 
is  maintained  by  their  convertibility  at  all  banks  of  issue.  By 
means  of  an  extensive  system  of  branches  of  the  Eeichsbank  scat- 
tered throughout  the  empire,  the  system  of  deposit  banking  is 
becoming  quite  popular,  thus  reducing  to  a  certain  extent  the 
use  of  bank  notes  in  the  transaction  of  business.  A  large  number 
of  joint  stock  banks  located  in  Berlin  and  other  prominent 
cities  of  the  empire  have  been  organized,  and  materially  assisted 
in  furnishing  banking  facilities  to  the  people  and  educating  the 
masses  in  the  utility  of  deposit  banking.  These  joint  stock 
banks,  as  a  rule,  carry  their  reserves  in  the  Reichsbank,  that 

institution  being  the  safest  and  most  convenient 
ReMr^es*^  storchousc  of  gold  in  the  empire.    Thus  it  will  be 

seen  that  these  banks  sustain  very  much  the  same 
relation  to  the  Reichsbank  that  the  joint  stock  banks  of  London 
do  to  the  Bank  of  England.  The  policy  of  the  management  of 
the  Reichsbank  has  been  to  guard  well  these  reserves  by  a  large 
supply  of  gold  in  the  vaults,  so  as  to  protect  the  credit  system  of 
the  empire  by  establishing  perfect  confidence.  Like  the  Bank 
of  England,  the  Reichsbank  resorts  to  the  scheme  of  raising 
or  lowering  its  rate  of  discount  to  protect  its  reserve,  raising 


200  HISTORY    OF    BANKING. 

its  rate  in  times  of  danger  and  lowering  it  in  times  of  peace 
and  plenty. 

In  order  that  the  action  of  the  Reichsbank  may  virtually 
control  the  money  market,  the  law  forbids  all  other  banks  of 
issue  to  discount  at  a  rate  lower  than  that  of  the  Eeichsbank 
when  its  rate  is  as  high  as  four  per  cent.  Thus  when  the 
Eeichsbank  raises  its  rate  to  or  above  four  per  cent,  all  of  the 
banks  of  issue  are  compelled  by  law  to  do  the 
Controls  other      ^^^^     ^^^^  ^^^  Rcichsbank  lowers  its  rate  below 

Joanks 

four  per  cent,  the  other  banks  are  allowed  to 
discount  at  a  rate  of  one-fourth  of  one  per  cent,  lower  than  the 
Eeichsbank  rate.  Were  it  not  compulsory  on  other  banks  to 
follow  the  rate  announced  by  the  Eeichsbank,  business  would 
merely  shift  from  one  bank  to  another  and  the  general  situation 
would  in  no  way  be  affected  or  improved.  The  Eeichsbank  has 
about  three  hundred  branches  scattered  throughout  the  empire 
and  with  the  influence  of  these  in  addition  to  the  banks  of 
issue  the  rate  of  discount  as  established  in  Berlin  by  the 
Eeichsbank  is  easily  maintained  and  made  to  control  the  price 
of  money  throughout  the  empire. 

In  addition  to  the  specie  and  bank  notes  in  circulation  in 
Germany  the  government  has  notes  of  its  own  in  circulation.  An 
imperial  "war  chest"  is  kept  in  which  is  stored  a  large  reserve 
Imperial  ^^  S^ld  as  an  emergency  fund  to  be  used  in  time 

Treasury  of  war.     This  fuud  is  estimated  at  150,000,000 

marks,  and  in  order  to  prevent  so  large  an  amount 
of  cash  from  lying  idle,  an  issue  of  imperial  treasury  notes  for 
an  equal  amount  is  put  into  circulation.  These  notes  are  really 
gold  certificates,  since  they  merely  circulate  instead  of  the  coin. 

EUSSIAN  BANKING. 

The  Imperial  Bank  of  Eussia  was  established  in  1860  with 
a  capital  of  25,000,000  roubles.  It  is  wholly  a  government  in- 
stitution, controlled  by  the  Czar,  and  has  no  connection  what- 


CIRCULATION    AND    REDEMPTION.  201 

ever  with  private  individuals,  except  to  the  extent  of  its  daily 
business  transactions.  It  thus  partakes  of  the  imperialistic 
character  of  the  government  in  a  decided  degree.    As  has  been 

expressed  by  one  economic  writer,  it  "is  as  if  we 
orRussL^*"^      had  a  bureau  in  the  Treasury  Department  with 

power  to  do  a  great  and  varied  banking  business 
and  with  branches  all  over  the  country."  Unlike  the  Bank  of 
England,  the  Bank  of  France,  or  the  Reichsbank  of  Germany, 
which  are  formed  by  means  of  private  capital,  the  Imperial 
Bank  of  Russia  is  merely  the  Russian  Government  engaged  in  the 
banking  business  with  its  own  capital  and  for  its  exclusive 
profit.  In  1896  the  capital  of  the  bank  was  increased  to  50,- 
000,000  roubles.  It  issues  the  paper  money  of  the  empire  ex- 
clusively. The  issue  and  the  commercial  banking  departments 
are  kept  entirely  separate,  upon  practically  the  same  plan  as 
that  followed  by  the  Bank  of  England. 

Paper  money  is  the  actual  medium  of  exchange  in  Russia. 
Notes  are  issued  in  denominations  of  100,  25,  5,  3  and  1  roubles 
and  are  full  legal  tender.  Specie  payments  have  been  suspended 
since  1855.  The  paper  rouble  is  worth  66^  copecks,  there  being 
100  copecks  in  a  rouble.     The  authorized  circulation  of  paper 

currency  based  upon  the  credit  of  the  govern- 
circuiation  mcut  is  769,342,911  roubles.     This  is  fiat  money. 

Above  this  the  note  issues,  if  any,  must  be  covered 
by  the  deposit  of  an  equal  amount  of  coin.  The  total  circulation, 
both  covered  and  uncovered,  is  about  1,100,000,000  roubles, 
and  the  metallic  cash  in  the  bank  vaults  is  in  the  neighborhood 
of  700,000,000  roubles,  of  which  less  than  twenty  millions  are 
in  silver. 

Although  the  bank  holds  what  is  called  a  redemption  fund, 
there  is  no  provision  made  for  the  redemption  of  the  notes.  The 
stock  of  gold  which  is  held  is  merely  for  the  purpose  of  estab- 
lishing confidence  in  the  minds  of  the  people,  preventing  fluctua- 
tions or  depreciation  of  the  paper  currency  and  holding  the 


202  HISTORY    OF    BANKING. 

value  of  the  paper  at  a  fixed  rate  in  proportion  to  gold.    Under 
this  policy  the  rouble  has  been  practically  stationary  in  value 

during  the  past  ten  years,  and  its  value  has  been 
Redemption         fixed  by  exchange  at  66f  copecks,  or,  one  gold 

rouble  as  equivalent  to  one  and  one-half  paper 
roubles.  The  paper  currency  is  thus  given  a  fixed  value  and 
the  two  roubles — paper  and  gold,  circulate  side  by  side  at  the 
agreed  value  of  three  to  two.  The  government  has  accumulated 
its  gold  reserve  by  retaining  most  of  the  gold  product  of  the 
Eussian  mines  in  recent  years. 

The  commercial  banking  department  of  the  Imperial  Bank 
of  Eussia  exercises  all  of  the  ordinary  functions  of  a  bank  of 
deposit.  By  means  of  its  one  hundred  branches  scattered 
throughout  the  empire,  the  Imperial  Bank  has  been  able  to 
reach  the  people  and  supply  needed  banking  facilities  in  a  fairly 
satisfactory  measure.  The  policy  of  the  present  Czar  is  to  de- 
commerciai  vclop  the  almost  limitlcss  resources  of  the  country. 
Banking  and  to  this  end  the  government,  through  its  bank, 

epartment  ^^  ^^^^  liberal  in  making  loans,  frequently  taking 
risks  which  would  not  be  regarded  as  safe  according  to  the  usual 
rules  of  credit.  The  government  no  doubt  is  willing  to  take 
some  risks  for  the  sake  of  the  general  betterment  of  the  country, 
and  it  can  afford  to  make  unusual  loans  since  it  has  extraordinary 
power  to  punish  delinquent  debtors. 

Loans  for  development  purposes  are  regarded  with  especial 
favor  by  the  loan  department  of  the  bank,  since  new  industries 
in  all  parts  of  Eussia  are  much  desired  by  the  Czar.    Agricultural 

loans  are  a  prominent  feature  of  Eussian  banking. 
Loans  These  consist  of  loans  made  to  small  farmers  upon 

a  pledge  of  their  products,  or  the  guarantee  of 
individuals  who  may  be  regarded  by  the  bank  as  trustworthy. 
Loans  are  also  made  to  mechanics  and  manufacturers  upon 
pledges  of  their  products.  In  both  this  and  the  agricultural 
class  of  loans  the  property  pledged  remains  in  the  possession  of 


LOANS.  203 

the  producers,  and  the  loans  are  made  for  long  terms — until  the 
products  can  be  marketed.  This  system  results  in  some  losses 
to  the  government,  but  the  general  benefit  to  the  country  by 
stimulating  industry  is  believed  by  Eussian  statesmen  to  more 
than  compensate  for  the  percentage  of  losses. 

It  will  be  seen  from  the  foregoing  description  that  the  Russian 
banking  system  is  not  a  complicated  one,  since  no  private  capital 
or  individual  management  is  involved.  Its  volume  of  circulating 
medium  is  dependent  upon  the  will  of  the  government,  and  is 
limited  only  by  the  amount  which  will  circulate  without  serious 
depreciation.  As  previously  stated  the  paper  currency  is  worth 
but  66^  per  cent,  of  gold,  but  the  government  aims  to  hold  it 
at  this  point.  This  can  only  be  done  by  strengthening  the  gold 
reserve,  and  the  financial  policy  of  the  government  is  to  do 
this.  In  case  of  hard  times  the  government  increases  the  volume 
of  money  sufficient  to  slightly  raise  prices  and  stimulate  produc- 
tion.   This  is  the  elasticity  of  the  Russian  system  of  currency. 


CHAPTEE  XXI. 

SCOTCH    AND    CANADIAN   BANKING. 

SCOTCH   SYSTEM;   BRANCH   BANKS;   CANADIAN    SYSTEM; 
ASSET   BANKING;   ELASTICITY. 

Banking  in  Scotland  is  conducted  upon  a  system  resembling 
in  many  respects  the  English,  and  yet  differing  from  it  in 
several  important  particulars.  There  are  ten  banks  of  issue,  each 
of  which  has  many  of  the  privileges  of  the  Bank  of  England, 
but  without  the  monopoly  which  the  latter  possesses  in  England 
and  Wales.  These  ten  banks  are  strictly  private  institutions, 
but  are  allowed  to  issue  notes  after  the  method  of  the  Bank  of 
Organization  England.  The  act  of  1845  regulating  the  banking 
of  the  Banks  System  of  Scotland,  fixed  the  volume  of  authorized 
of  Scotland  ^^^^  -gg^^g  ^^  ^^j  ^^^  ^^^^^  ^^  £3,087,209,  which, 

however,  has  since  been  reduced  by  the  suspension  of  two  banks 
to  £2,676,350.  All  note  issues  above  this  amount  must  be  fully 
covered  by  coin,  one-fifth  of  which  may  be  silver.  The  circula- 
tion on  June  30,  1900,  amounted  to  £7,903,000,  and  in  addition 
to  this,  Bank  of  England  notes  circulate  extensively  in  Scotland. 
A  large  portion  of  the  circulating  bank  notes  of  Scotland  are  in 
denominations  of  less  than  £5,  while  the  Bank  of  England  notes 
are  all  of  £5  or  upwards. 

May  and  November  in  Scotland  are  the  seasons  for  making 
the  regular  semi-annual  settlements.     Interest  on  mortgages  is 
then  collected,  and  annuities  are  received.     The  country  folk 
draw  the  interest  on  their  bank  deposits,  and  there 
Elasticity  is  a  general  liquidation  throughout  the  country  re- 

quiring an  additional  volume  of  currency.  The 
banks  are  then  pressed  to  enlarge  their  circulation,  and  in  order 
to  do  this  they  must  in  some  cases  bring  specie  from  the 
Bank  of  England,  the  great  storehouse  of  cash  for  the  United 

204 


SCOTCH    SYSTEM.  205 

Kingdom.  After  tlie  drain  is  over  the  circulation  falls  to  its 
normal  volume  and  the  boxes  of  gold  are  returned  to  London, 
without,  in  many  instances,  having  been  opened.  The  elasticity 
of  the  currency  would  be  much  greater  were  it  not  limited  by 
the  requirement  of  the  coin  deposit,  but  safety  in  Scotland,  as  in 
England,  is  preferred  to  elasticity,  and  the  quality  of  safety  is 
so  great  that  the  people  prefer  bank  notes  to  gold. 

A  novel  feature  of  the  Scotch  system  is  the  cash  credit 
accounts,  by  which  a  customer  whose  account  is  secured  by  the 
guarantee  of  two  friends,  is  supplied  with  funds  from  time  to 
time  as  he  needs  it  to  the  agreed  limit.  The  system  practically 
amounts  to  the  granting  of  permission  to  firms  or  individuals 

to  overdraw  their  bank  accounts  to  a  certain  ex- 
AccoJiTs*^'*  tent.    The  design  is  to  furnish  a  working  capital 

to  tradesmen  and  farmers,  especially  those  who 
are  possessed  of  good  character  but  with  little  means.  The  custom- 
er is  only  charged  interest  from  day  to  day  on  the  amount  which 
he  actually  draws  under  his  cash  credit  and  his  deposits  go  to  re- 
duce the  amount  of  such  interest.  The  difference  between  this 
arrangement  and  the  usual  way  of  covering  the  loan  with  a  note 
is  that  the  daily  deposits  of  the  customer  reduce  the  interest 
charge  and  the  bank  has  control  of  all  sums  not  in  active  use. 

Scotland  has  eleven  banks  and  these  have  1,077  branches. 
Nowhere  else  is  the  system  of  branch  banking  so  extensively 
carried  on,  a  feature  scarcely  known  in  the  United  States. 
Scotland  has  one  bank  or  branch  bank  to  every  4,000  of  popula- 
tion against  one  to  about  every  10,000  in  England,  and  one 
national   bank   to   nearly   every   20,000   people  in   the   United 

States.  With  a  population  of  only  a  little  over 
Branch  Banks      4,000,000  Scotland  has  bank  deposits  of  £103,674,- 

000,  or  nearly  £26  per  capita.  This  speaks  well 
for  the  thrift  of  the  people  and  may  be  attributed  in  a  large  part 
to  the  diffusion  of  branch  banks  into  every  corner  of  the  public 
domain.     In  the  early  history  of  banking  in  Scotland  a  low 


206  HISTOEY    OF    BANKING. 

rate  of  interest  was  paid  by  the  banks  on  current  deposit  ac- 
counts. This  no  doubt  stimulated  habits  of  saving  and  thrift 
among  the  people  and  taught  them  to  use  the  banks  as  de- 
positories for  their  funds.  Gradually  the  interest  was  reduced 
and  finally  abolished  on  all  but  savings  accounts,  with  little  or 
no  diminution  of  the  number  and  size  of  the  depositors'  accounts. 
Governed  by  a  head  bank,  the  expense  of  conducting  the  branches 
is  comparatively  small,  amounting  on  an  average  to  not  more 
than  l-J  per  cent,  on  the  deposits,  and  thus  with  the  economy 
of  resources  afforded  by  the  system,  the  eleven  institutions 
produce  earnings  which  enable  them  to  pay  dividends  of  8  to  15 
per  cent,  per  annum. 

THE    CANADIAN    SYSTEM. 

Prior  to  the  consolidation  of  the  various  provinces  into  the 
Dominion  of  Canada,  in  1867,  a  number  of  the  largest  banks 
issued  circulating  notes  under  permission  of  their  respective 
provincial  governments,  but  after  the  consolidation,  only  banks 
authorized  by  the  general  government  were  permitted  to  issue 
notes.  The  present  banking  system  of  Canada  somewhat  resem- 
bles that  of  Scotland,  and  possesses  some  excellent  features, 
among  which  is  its  system  of  "asset  currency"  with  its  very 
desirable  quality  of  perfect  elasticity.  In  1870  a  law  was  passed 
requiring  all  banks  of  issue  in  the  dominion  to  have  a  paid  up 
capital  of  at  least  $250,000,  and  restricting  the  note  issue  of 
each  bank  to  the  amount  of  its  paid  up  capital.  In  1891  the 
banking  act  was  amended  and  the  capital  stock  limit  of  issuing 
banks  was  raised  to  $500,000,  of  which  one-half  must  be  paid 
over  at  the  time  of  organizing  the  bank,  to  the  minister  of 
finance,  to  be  held  by  him  until  the  organization  is  complete  and 
all  details  of  the  law  have  been  complied  with.  He  then  pays 
back  to  the  bank  the  amount  so  deposited,  less  five  per  cent,  of 
the  capital,  which  is  retained  as  a  guaranty  fund,  to  be  used 
in  the  redemption  of  notes  in  case  of  the  failure  of  the  bank. 


CANADIAN    SYSTEM.  207 

A  Canadian  bank  may  issue  notes  to  the  full  amount  of  its 
capital  stock,  and  no  reserve  is  required  to  be  kept  on  hand  as  a 
security  for  their  redemption,  the  only  provision 
No  Reserve  of  this  kind  being  the  fund  in  the  hands  of  the 

treasurer,  composed  of  the  five  per  cent,  required 
to  be  deposited  by  each  bank  of  issue  at  its  forma- 
tion. Thus  the  notes  of  every  bank  are  credit  obliga- 
tions based  upon  almost  wholly  the  general  assets  of  the  bank, 
but  the  law  makes  them  a  first  lien  upon  such  assets,  liabilities  to 
the  dominion  government  being  a  second  lien,  and  liabilities  to 
the  provincial  government  a  third  lien.  In  addition  to  this 
very  excellent  precaution,  the  law  imposes  a  double  liability  upon 
the  stockholder,  making  each  liable  for  double  the  amount  of 
stock  which  he  holds.* 

No  inspectors  or  examiners  are  employed  by  the  government, 
but  monthly  reports  are  made  to  the  government  showing  the 
condition  of  the  bank's  assets,  circulation,  etc.,  and  severe  pen- 
alties— fine  and  imprisonment — are  prescribed  for  failure  to 
comply  with  the  law  or  the  making  of  false  returns. 
Inspection  The  banks  may  also  demand  of  each  other  state- 

ments as  to  their  condition  at  any  time,  and  thus 
the  most  careful  scrutiny  is  exercised  by  each  bank  upon  all  of 
the  others  as  well  as  by  the  government.  Since  each  bank  in  the 
regular  course  of  business  has  occasion  to  take  over  its  counter 
the  notes  of  other  banks,  the  care  exercised  against  taking  notes 
that  are  not  good  is  a  wholesome  restraint  upon  every  bank, 
and  under  the  system  every  banker  is  watching  the  solvency  of 
every  other.  This  supervision  is  far  more  thorough  and  effective 
than  that  of  government  inspection,  since  bankers  are  not  only 
more  capable  of  scrutinizing  such  institutions,  but  it  is  vital 
to  their  interest  to  do  this  in  the  most  thorough  manner. 


*Two  banks,  La  Bank  du  Peuple  and  the  Bank  of  British  North  America, 
exist  under  ancient  charters  which  do  not  permit  of  the  double  liability 
requirement  as  to  stockholder,  and  for  this  reason  they  are  only  allowed  to 
issue  notes  to  the  amount  of  75  per  cent,  of  their  capital. 


208  HISTORY    OF    BANKING. 

An  essential  feature  of  the  Canadian  system  is  the  fact  that 
the  bank  notes  are  not  a  legal  tender,  for  were  they  possessed 
of  this  quality,  other  banks  would  be  compelled  to  accept  them, 
irrespective  of  the  solvency  of  the  issuing  bank.     They  would 

circulate  then  not  upon  their  merits  but  upon  the 
Tender^*^  legal  tender  quality  underlying  them.     Without 

the  legal  tender  quality  to  float  the  circulating 
notes,  each  bank  takes  them  upon  the  soundness  of  the  bank 
issuing  them,  and  upon  the  slightest  indication  of  weakness  on 
the  part  of  the  issuing  bank  its  notes  are  thrown  out  and  it  is 
discredited.  Thus  any  bank  may  be  summarily  and  severely 
punished  the  moment  it  allows  itself  to  get  into  an  unsound  or 
weak  condition. 

The  banks  of  the  three  financial  centers  of  the  dominion, 
viz.,  Montreal,  Quebec  and  Toronto,  act  as  clearing  houses  for 
all  the  banks  of  the  dominion.  Notes  of  any  discredited  bank  are 
immediately  sent  to  them  for  redemption,  and  should  a  bank 
suspend,  liquidators  are  at  once  appointed  to  convert  the  assets 
and  redeem  the  circulating  notes.  In  case  the  assets  are  insuffi- 
cient for  this  purpose  the  extra  liability  of  the  stockholders  is 
resorted  to,  and  should  this  not  prove  sufficient,  then  the  five 
per  cent,  fund  in  the  hands  of  the  treasurer  is  forthcoming  for 

the  purpose.  Should  this  fund  become  exhausted. 
Liquidation  the  solvcut  banks  are  assessed  to  make  up  the 

difference.  As  a  matter  of  fact,  however,  the 
liquidators -are  always  able  to  redeem  the  notes  out  of  the  assets, 
but  in  order  that  all  solvent  banks  may  accept  the  notes  of  an 
insolvent  bank  without  loss,  the  law  provides  that  such  notes  shall 
bear  interest  at  the  rate  of  six  per  cent,  from  the  date  of  the  sus- 
pension of  the  bank  until  they  are  redeemed.  Thus  the  notes 
of  even  a  suspended  bank  never  fall  below  par.  After  the  lapse 
of  sixty  days,  if  the  liquidators  do  not  pay,  then  the  treasurer 
pays  them  out  of  the  redemption  fund. 

The  banks  are  compelled  to  keep  their  notes  at  par,  and  in 


CANADIAN    SYSTEM.  209 

order  to  do  this  they  must  provide  redemption  agents  at  various 

points  throughout  the  dominion.  Were  it  not  for 
Notes  at  Par        this  provision,  uotes  of  a  Montreal  bank  would  be 

at  a  discount  when  circulating  in  a  distant  prov- 
ince like  Manitoba,  for  the  reason  that  time  and  effort  would 
be  required  to  present  the  note  at  the  proper  place  for  redemption. 
The  elasticity  of  the  circulating  medium  is  one  of  the  features 
most  prized  in  the  Canadian  banking  system.  This  quality 
of  being  capable  of  expansion  and  contraction  according  to  the 
requirements  of  trade  is  possessed  by  the  note  circulation  of 
Canada  to  a  greater  extent  than  that  of  any  other  in  the  world. 
When  business  activity  demands  a  large  circulating  medium 
the  banks  issue  their  notes  to  meet  the  demand,  not  exceeding, 
of  course,  the  amount  of  their  paid  up  capital,  and  when  less 

money  is  needed  these  notes  drift  back  into  the 
uie  Currency        hauks  in  the  form  of  deposits  or  in  liquidation  of 

discounts  and  are  thus  practically  retired,  being 
locked  up  in  the  vaults.  They  are  not  then  idle  capital  since  they 
have  cost  nothing,  except  the  expense  of  printing  them.  The 
volume  of  the  circulating  medium  of  Canada  often  varies  as 
much  as  15  per  cent,  in  the  course  of  the  year.  As  a  matter  of 
fact  the  volume  of  notes  outstanding  is  usually  not  much  above 
75  per  cent,  of  the  paid  up  capital  of  the  banks,  thus  the  cur- 
rency has  an  expansibility  in  case  of  emergency  amounting  to 
nearly  one-fourth  its  usual  volume,  provided,  of  course,  the 
assets  of  the  bank  are  sound  in  quality.  As  a  result  of  this, 
rates  of  interest  in  Canada  are  comparatively  uniform,  and  a 
"tight"  money  market  is  unknown.* 

With  the   currency  based  upon  the  general  assets  of  the 
bank  having  a  priority  of  lien  over  all  other  liabilities,  being 


♦True  elasticity  in  banlj  note  circulation  implies  automatic  adjustment  of 
the  volume  to  the  needs  of  business.  Heretofore  the  Canadian  system 
has  worked  perfectly  because  the  banks  have  been  able  at  all  times  to 
supply  all  that  has  been  needed  without  exceeding  the  maximum  limit, 
and  that  limit  was  so  well  beyond  the  need  of  the  country  that  the  banks 


210  HISTORY    OF    BANKING. 

under  the  surveillance  of  not  only  the  government  but,  better 
still,  the  entire  banking  fraternity,  and  safeguarded  by  the 
double  liability  of  stockholders,  it  is  believed  that  the  note 
circulation  of  Canada  is  absolutely  safe,  and  possesses  advantages 
over  any  other  system. 

The  system  of  branch  banks  which  prevails  in  Canada  is  not 
only  an  advantage  to  the  banks,  but  a  decided  convenience  to 
the  people.  Nearly  every  bank  of  any  considerable  size  in  the 
dominion  has  a  number  of  branches  scattered  throughout  the 
provinces,  there  being  in  all  about  650  branches.  Weekly  re- 
ports are  made  to  the  head  bank,  and  thus  the  manager  is  kept 
fully  posted  as  to  the  business  transacted  by  the  branches.  By 
this  system  sparsely  settled  portions  of  the  dominion  are  pro- 
vided with  banking  facilities  through  a  branch 
Branch  Banks  bank,  where  the  business  in  that  particular  sec- 
tion would  not  be  sufficient  to  support  an  inde- 
pendent bank.  The  branch  may  be  conducted  in  a  small  and 
inexpensive  manner  suited  to  the  needs  of  the  community,  while 
it  furnishes  the  benefits  of  the  financial  strength  and  solidity 
of  the  parent  institution.  Then  again,  through  its  various 
branches  a  bank  is  able  to  loan  out  its  funds  advantageously 
where  money  is  most  needed.  In  one  province  there  may  be  an 
abundance  of  money  seeking  investment,  with  large  deposits  in 
the  banks,  while  in  another  where  the  work  of  development  of 
natural  resources  is  going  on,  there  may  be  a  demand  for 
money,  and  small  deposits  in  the  banks.  Now  by  transferring  the 
surplus  funds  from  the  one  province  to  the  other  both  are 
accommodated,  and  this  can  be  done  easily  and  readily  through 
the  agency  of  the  branch  bank  system.  Not  only  is  the  public 
accommodated,  but  by  this  means  the  banks  are  able  to  earn 

have  seldom  been  able  to  push  their  notes  out  so  as  to  raise  the  total 
beyond  75  per  cent,  of  the  maximum.  Of  late,  however,  the  rapid  develop- 
ment of  the  country  without  proportionate  increase  in  its  banking  capital 
has  changed  this  and  their  issues  now  approximate  very  nearly  to  the 
lawful  maximum  at  all  seasons, 


CANADIAN    SYSTEM.  211 

larger  dividends,  in  consequence  of  using  their  assets  to  the 
best  advantage.  Under  this  system  the  farmer  in  the  Northwest 
is  able  to  borrow  money  almost  as  cheaply  as  a  resident  of 
Quebec. 

Mr.  B.  E.  Walker,  President  of  the  Canadian  Bankers'  Asso- 
ciation, in  explaining  the  advantages  of  the  branch  system, 
said:  "In  Canada,  with  its  banks  with  forty  and  fifty  branches, 
we  see  the  deposits  of  the  saving  communities  applied  directly  to 
the  country's  new  enterprises  in  a  manner  nearly  perfect.  The 
Bank  of  Montreal  borrows  money  from  depositors  at  Halifax 
and  many  points  in  the  maritime  provinces  where  savings  largely 
exceed  the  new  enterprises,  and  it  lends  money  in  Vancouver  or 
in  the  Northwest,  where  the  new  enterprises  far  exceed  the 
people's  earnings."  As  water  "seeks  its  level"  so  money  will 
to  a  certain  extent  flow  where  the  greatest  demand  for  it  exists 
and  the  highest  rates  of  interest  are  paid,  but  by  means  of  the 
system  of  branch  banks  this  ebbing  and  flowing  of  the  financial 
tide  is  greatly  facilitated. 

A  third  advantage  growing  out  of  this  mobility  of  the  finan- 
cial system  is  that  a  financial  stringency  in  any  part  of  the 
Dominion  can  be  instantly  relieved  by  transferring  funds  from 
any  other  part,  thus  averting  what  might,  under  other  circum- 
stances, become  a  panic  or  commercial  crisis. 

In  the  United  States  under  our  law  there  can  be  no  branch 
banks  in  our  national  banking  system  because  every  national 
bank  must  have  a  capital  of  at  least  $25,000,  and  when  a  strin- 
gency arises  in  any  part  of  the  country,  the  banks  both  there 
and  elsewhere  usually  look  out  for  their  own  welfare,  and  money 
does  not  flow  to  the  point  where  it  is  needed,  as  under  the 
branch  bank  system. 

While  the  law  does  not  specifically  require  the  banks  to 
carry  a  reserve,  in  order  to  protect  their  notes,  nearly  all  of  the 
Canadian  banks  maintain  a  reserve  as  a  means  of  demonstrating 
their  strength  and  as  a  practical  necessity  in  the  conduct  of  their 
business. 


312  HISTORY    OF    BANKING. 

The  Canadian  government  issues  a  paper  currency  called 
"Dominion  Notes"  which  is  a  legal  tender  and  redeemable  in 
gold  on  demand.  These  notes  are  issued  in  denominations  of 
25c,  $1,  $2,  $4,  $50,  $100,  $500  and  $1,000,  and  together  with 
a  small  proportion  of  silver,  furnish  the  circulating  medium 

for  small  transactions,  the  bank  notes  not  being 
No™s°'°°  issued  in  denominations  below  $5,  and  above  that 

amount  only  in  multiples  of  five.  In  making  pay- 
ments every  bank  is  compelled,  if  required,  to  pay  small  Domin- 
ion notes  to  an  amount  not  exceeding  $100.  Thus  the  notes 
readily  circulate,  keeping  the  bank  note  circulating  at  par  with 
it,  and  the  whole  upon  a  gold  basis.  There  is  no  limit  upon  the 
issue  of  notes  by  the  government,  but  for  all  over  $20,000,000  an 
equal  amount  of  gold  must  be  held  by  the  minister  of  finance. 
Below  that  amount  the  government  reserve  consists  of  gold 
and  Dominion  bonds. 


-\ 


CHAPTER  XXII. 

BANKING  IN  THE  UNITED  STATES. 

COLONIAL   PERIOD;  BANK   OF   NORTH   AMERICA;   HAMILTON'S 
VIEWS;  FIRST  UNITED   STATES  BANK;   STATE  BANKS. 

Prior  to  the  achievement  of  their  independence  the  banking 
facilities  of  the  colonies  were  not  only  very  limited,  but  crude 
and  unsettled.  No  well  defined  system  of  finance  or  banking  had 
been  worked  out,  even  in  the  older  countries  of  Europe.  The 
Bank  of  England  came  the  nearest  to  a  settled  plan,  but  it  was  in 
the  experimental  stage,  constantly  changing  its  policy  or  methods 
during  the  first  hundred  years  of  its  existence.  Men  did  not 
understand  finance.  They  were  groping  about,  experimenting, 
trying  all  manner  of  schemes  and  hoping  to  find  the  successful 
one.  The  first  banking  experiment  in  this  country  of  which 
we  have  any  reliable  account  was  started  in  Boston  in  1714, 
and  was  to  be  a  land  bank,  patterned  no  doubt  on  ideas  borrowed 
from  John  Law  of  France.  This  scheme  was  entitled  "A  Pro- 
jection for  Erecting  a  Bank  of  Credit  in  Boston,  New  England, 
Founded  on  Land  Security."  The  capital  was  fixed  at  £300,000, 
and  each  subscriber  to  the  stock  was  required  to  "settle  and  make 
over  real  estate  to  the  value  of  his  respective  subscription  to 
the  trustees  of  the  partnership  or  bank,  to  remain  as  a  fund 
or  security  for  such  bills  as  shall  be  emitted  therefrom."     At 

meetings  of  the  stockholders,  each  person  should 
Banki'ng  ^^^  ^^^®  moTe  than  five  votes,  irrespective  of  the 

number  of  shares  which  he  held.  Loans  were  to 
be  made  on  "ratable  estates"  to  the  amount  of  two-thirds  their 
value;  on  wooden  houses,  not  exceeding  the  value  of  the  land 
included  with  the  house;  on  brick  houses,  to  the  extent  of  one 
and  a  half  times  the  value  of  the  land  belonging  to  them;  "on 

213 


214  HISTORY    OP    BANKING. 

iron  or  other  imperishable  commodities  as  a  pledge,  for  a  half  or 
two-thirds,  according  to  the  market."  The  scheme  was  very 
popular,  especially  with  the  irresponsible  class  and  those  pos- 
sessed of  real  estate  but  no  ready  cash,  who  wanted  to  borrow 
money  on  easy  terms.  The  project  was  vigorously  attacked  in 
a  pamphlet  by  Paul  Dudley,  attorney  general,  who  showed  that 
the  pretended  land  security  for  the  bills  was  in  reality  no 
security  at  all,  since  the  holder  of  them  could  do  nothing  with 
a  mortgage  if  it  w^ere  turned  over  to  him.  He  gave  it  as  his 
legal  opinion  that  the  mortgages  were  without  consideration 
and  would  not  be  enforced  by  the  courts.  When  a  charter  was 
applied  for,  the  scheme  was  vetoed  by  the  Colonial  Legislature. 
Next  came  the  Land  Bank  of  1741,  a  "pernicious  grand  bubble," 
a  scheme  which  convulsed  society  in  its  day  and  came  near  pro- 
ducing a  revolution.  This  bank  began  to  issue  circulating  notes 
without  a  charter.  The  governor  issued  a  proclamation  against 
it  and  a  general  quarrel  ensued.  New  banks  now  began  to  be 
organized,  in  imitation  of  this  one,  in  all  towns  of  importance 
and  a  regular  banking  mania  broke  out.  The  financial  schemes 
were  projected  by  "a  vast  multitude  of  necessitous,  idle  and 
extravagant  persons,  (who)  contrived  to  obtain  what  they  call 
money,  at  an  easy  rate  and  to  pay  their  debts  in  a  precarious, 
fallacious  kind  of  bills,  very  illy  or  not  at  all  secured,  of  no  de- 
termined value,  bearing  no  interest,"  and  payable  at  some  in- 
definite time.  The  situation  resembled  somewhat  that  which 
had  existed  in  England  during  the  South  Sea  speculative  mania, 
and  to  bring  the  colonists  to  their  senses  and  put  a  stop  to  these 
wild  schemes,  Parliament  extended  the  prohibitions  and  penal- 
ties of  the  Anti-Bubble  Act  to  the  colonies.  This  stirred  up 
much  antagonism  and  resentment  in  the  minds  of  the  people, 
but  resulted  in  killing  the  Land  Bank.  The  liquidation  of  the 
bank's  afi'airs  extended  over  a  period  of  almost  a  quarter  of  a 
century,  and  nearly  every  one  who  had  any  connection  with  the 
institution  was  ruined. 


COLONIAL    BANKING.  215 

During  the  Revolutionary  War,  one  of  the  most  difficult 
and  embarrassing  problems  which  confronted  the  Continental 
Congress  was  the  money  question.  How  to  provide  the  means 
for  keeping  the  armies  in  the  field  was  a  knotty  question.  The 
treasury  was  bankrupt,  and  Congress  possessed  no  power  to  com- 
pel the  several  states  comprising  the  confederacy  to  pay  their 
just  portion  of  the  taxes.  Congress  undertook  to  tide  over  the 
emergency  by  issuing  bills  of  credit,*  which  were  to  pass  as 
currency,  but  as  millions  upon  millions  of  these  were  printed, 
and  as  the  prospects  of  a  successful  termination  of  the  war  be- 
came doubtful,  these  bills  sank  in  value  until  in  1778  a  dollar 
During  the  ^^^  worth  but  Sixteen  cents  in  gold.    In  1780  it 

Revolutionary  had  fallen  to  two  ceuts,  and  in  1782  it  required 
^*'  $1,000  in  notes  to  equal  $1  in  gold.     Different 

states  issued  paper  money  at  the  same  time  which  circulated  at 
various  values.  The  people  were  poor,  in  debt,  and  discon- 
tented, and  general  grumbling  prevailed.  In  order  to  remedy  this 
state  of  affairs  and  bring  some  degree  of  financial  order  out  of 
the  general  confusion,  Robert  Morris,  then  superintendent  of 
finance,  in  1782  obtained  a  charter  from  the  Continental  Con- 
gress for  the  Bank  of  North  America,  at  Philadelphia.  The 
continental  money  was  then  almost  worthless,  having  caused,  as 
Mr.  Morris  said,  "Infinite  private  mischief,  numberless  frauds, 
and  the  greatest  distress,"  and  he  rightly  believed  that  a  large 
bank,  properly  conducted,  and  under  control  of  the  government 
would  be  of  great  service  to  both  the  government  and  the  people. 
The  capital  of  the  bank  was  $400,000,  and  its  affairs  were  con- 
ducted by  a  board  of  twelve  directors,  under  the  inspection  of 
the  superintendent  of  finance,  who  was  to  receive  daily  reports 
of  the  business  of  the  bank.  By  the  fortunate  arrival  of  $470,- 
000  in  specie  from  France  about  this  time,  which  was  deposited 
in  the  bank,  thereby  greatly  strengthening  its  standing  and 

*Blll8  of  credit  were  issues  of  pure  fiat  money,  based  upon  no  assets  and 
having  only  the  faith  of  the  people  in  the  issuing  government  to  support 
them. 


21G  HISTORY    OF    BANKING. 

credit,  the  bank  was  enabled  to  make  large  loans  to  the  govern- 
ment for  the  purchase  of  army  supplies.  Mr.  Morris  afterwards 
said,  "Without  the  establishment  of  a  national  bank,  the  business 
of  the  department  of  finance  could  not  have  been  performed," 
and  the  war  could  not  have  been  successfully  prosecuted. 

As  some  doubt  existed  as  to  the  validity  of  a  charter  from 
Congress,  the  bank  applied  to  and  received  one  from  the  state 
of  Pennsylvania.  After  the  close  of  the  war  the  bank  did  a  pros- 
perous business,  earning  dividends  as  high  as  14  per  cent.  These 
tempting  gains  prompted  the  starting  of  another  bank,  but  the 
Bank  of  North  America  prevented  competition  by  absorbing  the 
new  institution,  thereby  increasing  its  capital  stock  to  $830,000. 
Some  dissatisfaction  arose  among  the  "debtor  class"  of  the  bank's 
customers  on  account  of  the  bank's  practice  of  requiring  its 
paper  to  be  promptly  met  at  maturity,  and  the  legislature  was 

petitioned  to  annul  its  charter,  urging  "usury,  ex- 
Rep^red"  tortion,  favoritism,  harshness  to  debtors  and  the 

possession  of  undue  political  and  commercial  in- 
fluence." Strange  as  it  may  seem,  the  petition  was  granted  and 
the  charter  annulled  in  1785.  The  bank  continued  to  do  busi- 
ness under  its  governmental  authority,  and  in  1787  the  legis- 
lature of  Pennsylvania  repented  of  its  former  ill  considered 
action  and  renewed  the  charter.  When  Alexander  Hamilton 
took  charge  of  the  government  finances  in  1790  he  was  opposed 
to  continuing  the  Bank  of  North  America  as  a  government 
agent,  claiming  that  its  state  charter  virtually  annulled  its 
national  one,  and  made  the  bank  a  state  institution.  Washing- 
ton and  Congress  seemed  to  accept  this  view,  and  abandoned  all 
government  connection  with  the  bank.  It  continued  to  do 
business  as  a  state  bank  until  the  organization  of  our  national 
banking  system,  when  it  entered  the  list  as  a  national  bank.  By 
a  special  dispensation,  in  view  of  its  illustrious  origin,  it  was 
permitted  to  qualify  under  the  national  banking  law,  without 
changing  its  name,  and  so  continues  to  the  present  time  a  vener- 


BANK    OF    NORTH    AMERICA.  217 

able  and  useful  institution,  the  oldest  bank  in  the  United  States. 

Between  1782  and  1790,  the  Bank  of  North  America  had 
been  the  depository  of  the  government  funds,  had  collected  and 
disbursed  the  revenues,  and  performed  most  of  the  functions 
which  are  now  performed  by  the  government  treasury,  but  in  his 
report  of  December  13,  1790,  Hamilton  strongly  recommended 
the  organization  of  a  United  States  Bank  large  enough  and 
strong  enough  to  furnish  a  uniform  and  stable  currency  as  well 
as  to  properly  perform  the  duties  of  financial  agent.  In  this  he 
took  the  ground  that  the  government  should  not  issue  paper 
money  directly,  but  that  a  great  bank,  strong 
Report°i7^  cnough  for  the  purpose,  should  make  such  issue 
subject  to  governmental  restrictions.  Hamilton 
understood  the  functions  of  a  bank  and  saw  how  it  served  as 
a  manufactory  of  credit.    He  said: 

"Every  loan  which  a  bank  makes  is,  in  its  first  shape  a 
credit  given  to  the  borrower  on  its  books,  the  amount  of  which 
it  stands  ready  to  pay,  either  in  its  own  notes,  or  gold  or  silver 
at  his  option.  But,  in  a  great  number  of  cases,  no  actual  payment 
is  made  in  either.  The  borrower,  frequently,  by  check  or  order, 
transfers  his  credit  to  some  other  person,  to  whom  he  has  a 
payment  to  make,  who  in  his  turn  is  as  often  content  with  a  simi- 
lar credit  because  he  is  satisfied  that  he  can,  whenever  he  pleases, 
either  convert  it  into  cash  or  pass  it  to  some  other  hand,  as  an 
equivalent  for  it,  and  in  this  manner  the  credit  keeps  circulating, 
performing  in  every  stage  the  office  of  money,  till  it  is  extin- 
guished by  a  discount  with  some  person  who  has  a  payment  to 
make  to  the  bank,  to  an  equal  or  greater  amount.  Thus  large 
sums  are  lent  and  paid,  frequently  through  a  variety  of  hands, 
without  the  intervention  of  a  single  piece  of  coin." 

A  bill  was  introduced,  in  accordance  with  Hamilton's  sug- 
gestions, for  the  creation  of  the  first  United  States  Bank,  to  be 
located  in  the  city  of  Philadelphia.  This  bill  met  with  strenu- 
ous   opposition    from   the   "strict   constructionists."     Madison 


318  HISTORY    OF    BANKING. 

was  the  leader  of  the  opposition  in  the  House,  his  main  objection 
to  the  measure  being  "That  the  power  of  establishing  an  incor- 
porated bank  was  not  among  the  powers  vested  in  Congress  by 
The  First  *^^  Constitution."    But  in  answer  to  this,  Hamil- 

united  states        tou  cxpoundcd   the   doctrinc   of  implied  powers, 
claiming  that   the  power  to   create  a  bank  was 
clearly  implied  from  the  express  power  given  Congress  by  the 
constitution.    The  bill  became  a  law  on  February  25,  1791.    Its    • 
chief  provisions  were: 

1.  The  bank  was  to  have  a  capital  of  $10,000,000,  divided 
into  25,000  shares  of  $400  each.  Eight  millions  of  the  capital 
stock  were  open  to  subscriptions  by  the  people,  one-fourth  to  be 
paid  in  specie  and  three-fourth  in  government  bonds.  The 
remaining  two  millions  were  to  be  subscribed  by  the  government, 
payable  in  ten  annual  installments. 

2.  Each  stockholder  could  cast  one  vote  for  one  share  of 
stock,  one  for  the  next  ten  shares,  etc.,  but  no  shareholder  could 
cast  more  than  thirty  votes.  Foreign  stockholders  could  not 
vote  by  proxy,  and  thus  were  practically  prohibited  from  voting, 
the  object  being  to  prevent  the  bank  from  being  controlled  by 
a  few  individuals  or  by  foreigners. 

3.  The  bank  was  to  be  managed  by  twenty-five  directors,  all 
of  whom  must  be  citizens  of  the  United  States. 

4.  The  bank  could  lend  money  on  real  estate  security 
but  could  not  hold  title  to  real  estate  except  temporarily,  until 
it  could  be  properly  disposed  of. 

5.  The  bank  could  issue  circulating  notes  to  the  amount 
of  its  capital  stock.  These  notes  were  receivable  for  public  dues 
as  long  as  they  were  payable  in  gold  and  silver  coin. 

6.  The  head  of  the  treasury  should  have  the  right  to  inspect 
all  accounts  of  the  bank  except  depositors'  accounts,  and  could 
call  for  reports  weekly  if  he  desired. 

7.  The  directors  could  establish  branches  as  they  chose 
for  the  purpose  of  deposit  and  discount. 


FIRST    UNITED    STATES    BANK.  2ld 

8.  The  bank's  charter  was  to  run  twenty  years,  and  the 
government  pledged  itself  to  grant  no  other  charter  for  a  like 
institution  during  that  period. 

Branches  were  organized  in  New  York,  Boston,  Baltimore, 
Norfolk,  Charleston,  Savannah,  Washington  and  New  Orleans, 
Branches,  and  the  bank  at  once  became  a  successful  and  pros- 

Frnanciai  pcrous  institution.    After  the  abandonment  of  the 

Success  Bank  of  North  America  by  the  government  as  a 

place  of  deposit  for  public  funds,  the  customs  receipts  of  1790 
and  1791  had  been  deposited  in  state  banks.  These  were  drawn 
against  for  current  outlays,  and  the  cash  receipts  were  placed  in 
the  Bank  of  the  United  States,  thus  gradually  the  accounts  of  the 
government  in  the  state  banks  were  depleted  and  extinguished 
and  the  national  funds  passed  into  the  hands  of  the  Bank  of 
the  United  States.  The  great  bank  thus  became  the  custodian 
of  the  government  funds.  It  sold  bonds,  transferred  funds  from 
place  to  place  as  needed,  and  disbursed  public  money  on  warrants 
as  directed  by  the  treasurer.  It  also  made  loans  to  the  govern- 
ment, and  by  1795  these  amounted  to  nearly  $6,000,000.  The 
bank  was  a  great  financial  success.  By  its  policy  of  satisfactory 
dealings  with  the  public  and  the  government  it  maintained  an 
excellent  reputation.  Its  paper  currency  had  the  effect  of  giving 
stability  and  uniformity  to  the  money  of  the  country,  and  in 
many  ways  it  contributed  to  the  national  prosperity  and  welfare, 
besides  earning  dividends  at  an  average  rate  of  8f  per  cent, 
for  its  stockholders. 

The  government  was  very  slow  with  the  payment  of  its 
installments  to  the  capital  stock  of  the  bank  and  in  1796  the 
first,  second,  third,  fourth  and  fifth  installments  were  due  and 
almost  wholly  unpaid.  The  government  then  began  selling  its 
stock  to  private  individuals  and  by  1802  its  entire  interest  had 
been  disposed  of.  In  1809  Secretary  Gallatin  reported  that 
the  government  had  made  a  profit  of  $671,860  on  the  sale  of  its 
stock  in  the  bank.    A  large  portion  of  the  stock  had  passed  into 


230  HISTORY    OF    BANKING. 

the  hands  of  foreigners,  so  that  only  7,000  shares  were  owned 
by  American  citizens,  while  18,000  were  held  abroad.  The  cir- 
culating notes  outstanding  at  that  time  were  $4,500,000;  specie 

on  hand,  $5,000,000;  loans  and  discounts,  $15,- 
the  Bank^  °         000,000.  Thus  the  bank  was  in  excellent  condition, 

and  the  stockholders  in  1810  applied  for  a  renewal 
of  its  charter,  enumerating  in  their  petition  to  Congress  the 
advantages  which  the  bank  had  afforded  the  government,  as  a 
depository  of  the  public  funds;  the  transfer  and  disbursement 
of  public  money  free  of  cost;  loans  to  the  government;  a  stable 
paper  currency;  profit  from  the  sale  of  stock,  etc. 

A  contest  of  extreme  bitterness  ensued.  Secretary  Gallatin 
strongly  recommended  the  renewal  of  the  charter,  with  an  in- 
crease of  the  capital  of  the  bank  to  $30,000,000.  Of  this  amount 
$15,000,000  should  be  subscribed  by  such  states  as  desired  it, 
and  branches  should  be  organized  in  all  states  thus  subscribing. 
In  anticipation  of  the  prospective  war  with  England,  Mr.  Gallatin 
inserted  a  clause  in  the  proposed  charter  obligating  the  bank 
to  lend  three-fifths  of  its  capital  to  the  government  whenever  re- 
quired to  do  so.  Just  at  this  time  the  feeling  against  England 
ran  high,  and  the  fact  that  18,000  shares  of  the  bank  were  held 
abroad,  mostly  in  England,  aroused  a  strong  feeling  of  resentment 
and  opposition  towards  the  bank.  Mr.  Gallatin  reminded  the 
Opposition  to  peoplc  that  foreigners  had  no  voice  in  the  con- 
Renewai  of  duct  of  the  bank,  and  that  in  case  the  renewal  of 

the  Charter  ^-^^  charter  was  denied,  it  would  be  necessary  to 

remit  about  $7,200,000  abroad  at  once  in  settlement  for  the 
stock  held  there,  that  being  its  market  value,  and  that  the  country 
could  illy  afford  to  spare  that  amount  of  specie  on  the  eve  of  war, 
when  every  dollar  would  be  needed  at  home,  whereas  if  the 
charter  was  renewed  it  would  only  be  necessary  to  remit  to 
England  the  annual  dividend  of  about  8J  per  cent.,  equivalent 
in  effect  to  having  an  English  loan  of  $7,200,000  at  8i  per 
cent,  to  aid  us  in  the  war.     But  such  arguments  only  seemed 


FIRST    UNITED    STATES    BANK.  281 

to  inflame  the  opposition.  Henry  Clay,  then  just  coming  into 
popularity,  threw  his  influence  on  the  side  against  renewal,  on 
the  grounds  that  "the  Constitution  did  not  originally  authorize 
Congress  to  grant  the  charter,"  hence  a  renewal  of  it  would 
be  unconstitutional  for  the  same  reason.  Five  years  later  Mr. 
Clay  was  a  strong  advocate  of  the  establishment  of  the  Second 
Bank  of  the  United  States,  having  reversed  his  former  opinion 
on  the  question  of  constitutionality. 

The  decisive  vote  for  renewal  was  taken  in  the  House  on 
January  24,  1811,  and  failed  by  a  majority  of  165  to  64.  The 
Senate  voted  on  a  similar  bill  on  February  20,  resulting  in  a 
tie — 17  to  17,  whereupon  George  Clinton,  the  Vice  President, 
cast  the  deciding  vote  against  the  bank.  The  bank  went  into 
liquidation  and  paid  the  shareholders  $434  for  each  share  of 
$400.  Irresponsible  state  banks  now  sprang  into  existence 
everywhere,  hoping  to  reap  the  profits  heretofore  enjoyed  by  the 
Bank  of  the  United  States.  The  country  was  flooded  with 
paper  money,  secured*  by  insignificant  reserves.  In  this  state 
of  affairs,  with  its  financial  machinery  disorganized,  the  country 

in  the  following  year  entered  upon  a  war  with 
E^pan«\)n*'  Great  Britain.     A  more  reckless  and  unfortunate 

condition  of  affairs  could  scarcely  exist.  Bank 
charters  were  very  loosely  granted  by  the  various  states,  and  in 
some  instances  banks  were  allowed  to  begin  business  before 
their  capital  stock  had  been  actually  subscribed,  and  they  traded 
on  the  money  received  from  depositors.  At  the  time  of  the 
closing  of  the  Bank  of  the  United  States  in  1811  there  were  in 
existence  eighty-eight  state  banks  with  a  combined  paper  circu- 
lation equal  in  value  to  the  notes  of  the  United  States  Bank, 
and  hence  equal  to  gold,  amounting  to  $28,000,000.  This  num- 
ber increased  until  in  1815  there  were  208  banks  with  $110,000,- 
000  notes  outstanding.  This  unwarranted  increase  in  banks  and 
paper  money  was  fast  placing  the  country  in  a  condition  where 
disaster  was  inevitable.    In  1814,  the  British  captured  the  city 


222  HISTORY    OF    BANKING. 

of  Washington  and  burned  the  White  House.  The  news  spread 
consternation  throughout  the  country  and  caused  a  bank  panic, 
resulting  in  the  suspension  of  specie  payments  throughout  the 
country,  with  the  exception  of  portions  of  New  England.  There 
the  laws  had  been  more  stringent  and  imposed  a  penalty  upon 
any  bank  which  should  fail  to  redeem  its  notes  in  coin.  This 
had  the  effect  of  restraining  the  over  issue  of  circulating  notes, 
and  hence  the  New  England  banks  were  able  to  weather  the 
storm,  and  kept  their  notes  at  par  with  specie  throughout  the 
crisis.  Wherever  specie  payment  was  suspended,  there  deprecia- 
suspension  ^^^^  ^^  ^^^  Currency  at  once  set  in,  and  since  the 

of  Specie  paper  money  was   issued   by  banks  in  different 

Payments  gtatcs,  uudcr  a  Variety  of  laws  and  conditions,  the 

depreciation  was  not  uniform.  In  New  York  it  was  20  per  cent., 
in  Philadelphia  24  per  cent,  and  in  Baltimore  30  per  cent. 
The  citizens  of  New  England  paid  their  taxes  and  other  obliga- 
tions in  money  as  good  as  gold,  while  those  of  New  York,  Penn- 
sylvania or  Maryland  paid  in  depreciated  paper.  The  injustice 
of  this  was  apparent,  but  the  government  could  not  remedy  the 
evil,  since  the  depreciated  paper  was  the  only  money  to  be  had 
in  a  large  portion  of  the  country.  Government  bonds  were  sell- 
ing at  85  cents  on  the  dollar,  although  paid  for  in  currency 
worth  only  70  to  80  cents.  To  prosecute  a  war  successfully 
under  these  conditions  would  seem  a  very  difficult  undertaking. 
Its  success  must  have  been  due  in  a  very  large  measure  to  the 
patriotism  of  the  people.  Many  of  the  state  banks  scattered 
throughout  the  various  states  were  government  depositories,  and 
held  large  amounts  of  government  funds,  but  as  the  depreciated 
currency  of  one  state  would  not  circulate  in  another  the  gov- 
ernment was  unable  to  transfer  the  surplus  it  might  have  in  one 
locality  to  places  where  it  was  needed  to  meet  public  demands. 
To  overcome  this  evil,  it  became  necessary  to  issue  treasury  notes. 
The  friends  of  the  United  States  Bank  ascribed  all  of  the 
existing  evils  to  the  failure  to  renew  the  charter  of  the  bank 


FIRST    UNITED    STATES    BANK.  323 

and  its  resulting  consequences,  and  this  view  was  generally 
acquiesced  in.  If  the  bank's  charter  had  been  renewed  $7,200,- 
000  in  specie  need  not  have  been  shipped  to  Europe  to  pay  the 
stockholders,  thus  draining  the  country  of  a  large  part  of  its 
gold  and  furnishing  England  with  money  to  prosecute  a  war 
against  us.  The  increase  in  the  number  of  state  banks  would 
have  been  prevented  and  their  issues  of  paper  money  in  excess 
of  their  power  to  redeem  would  have  been  avoided.  Secretary 
Gallatin  said:     "Suspension  (of  specie  payments)  might  have 

been  prevented  at  the  time  when  it  took  place  had 
th?curr°ency        ^^^  former  Bank  of  the  United  States  been  still 

in  existence."  During  its  life-time  the  bank  had 
regulated  the  currency  by  means  of  its  example,  its  strength, 
and  the  fact  that  it  was  the  fiscal  agent  of  the  government.  Its 
own  notes  were  always  equal  to  specie  and  the  state  banks  were 
required  to  keep  theirs  up  to  the  same  standard,  or  otherwise  they 
would  be  "thrown  out"  by  the  great  bank,  and  no  longer  re- 
ceived for  taxes  and  government  dues.  With  a  bank's  notes 
thus  discredited  its  customers  would  desert  it  for  other  and  mare 
responsible  banks  or  for  the  branches  of  the  United  States 
Bank,  located  throughout  the  country.  Thus  the  term  "Kegu- 
lator  of  the  Currency"  was  not  a  misnomer  when  applied  to 
the  great  Bank  of  the  United  States. 

Notwithstanding  the  war  was  over  a  few  months  after  the 
suspension  of  specie  payments,  and  commerce  resumed  its  cus- 
tomary channels,  no  effort  was  made  by  the  state  banks  to  re- 
sume specie  payments.  It  was  not  to  their  pecuniary  advantage 
to  do  so,  as  long  as  they  could  float  a  large  volume  of  irredeem- 
able paper  money.  A  year  passed  and  yet  the  banks  showed 
The  Second  ^^  ^^S^  ^^  attempting  to  resume.    The  welfare  of 

United  States       the  couutry  demanded  that  something  should  be 

done,  and  yet  Congress  had  not  power  to  compel 
the  state  banks  to  change  their  policy.  Naturally  public  opinion 
turned  in  favor  of  a  new  bank  modeled  on  the  plan  of  the 


224  HISTORY    OF    BANKING. 

former  one.  President  Madison,  although  opposed  to  the  first 
bank  on  constitutional  grounds,  now  in  his  message  of  December 
5,  1815,  suggested  a  national  bank  as  a  suitable  instrumentality 
for  bringing  about  the  resumption  of  specie  payments.  Secre- 
tary Dallas  urged  the  organization  of  such  a  bank,  and  on 
April  10,  1816,  Congress  passed  a  law  creating  the  Second  Bank 
of  the  United  States,  on  lines  similar  to  the  first,  with  a  capital 
of  $35,000,000.  Later  on  Mr.  Webster  introduced  a  bill  to 
the  effect  that  after  February  20,  1817,  the  secretary  of  the 
treasury  should  receive  for  public  dues  only  treasury  notes,  the 
notes  of  the  United  States  Bank  and  of  those  state  banks 
which  were  paying  specie  on  demand.  This  virtually  compelled 
the  resumption  of  specie  payments  on  the  date  mentioned,  after 
a  suspension  otf  two  and  a  hali  years. 


CHAPTER  XXIII. 

BANKING  IN  THE  UNITED  STATES. 

SECOND  UNITED  STATES  BANK;  THE  GREAT  BANK  WAR;  SUFFOLK 

BANK    SYSTEM;    SAFETY    FUND    SYSTEM; 

WILD   CAT   BANKING. 

The  charter  of  the  Second  Bank  of  the  United  States  was  for 
twenty  years.  Its  capital  was  $35,000,000,  of  which  amount  the 
government  subscribed  $7,000,000,  and  in  consideration  of  this 
five  of  the  twenty-five  directors  were  to  be  appointed  by  the 
President.  The  main  bank  was  located  in  Philadelphia  and 
branches  were  established  in  different  states  wherever  two  thou- 
sand shares  or  more  of  the  bank's  capital  had  been  subscribed. 
The  bank  and  its  branches  were  to  have  the  deposits  of  the 
national  treasury,  transact  exchanges,  negotiate  loans  and  perform 
other  similar  duties  for  the  treasury  free  of  charge.  The  bank 
Charter  of  the  ^^^  allowcd  to  issuc  uotcs  in  denominations  of  not 
Second  United  less  than  $5  ou  the  same  terms  as  the  first  bank, 
that  is  to  say,  its  aggregate  note  circulation  must 
not  exceed  its  capital  stock.  Its  notes  were  given  preference 
over  all  others  by  being  receivable  for  all  dues  to  the  United 
States.  These  notes  were  payable  on  demand,  and  in  the  event 
of  the  bank  failing  to  redeem  its  notes  or  suspending  specie 
pa3'ment,  it  was  required  to  pay  interest  at  12  per  cent,  on  its 
notes.  Congress  pledged  itself  not  to  grant  a  charter  to  any 
other  bank  during  the  life  of  the  charter  to  this.  Thus  it  will 
be  seen  that  the  Second  Bank  of  the  United  States  was  similar 
in  its  main  features  to  the  first.  It  was  larger,  its  note  issues 
would  be  greater,  and  to  prevent  the  bane  of  irredeemable  paper 
money,  a  penalty  in  the  form  of  interest  was  imposed  upon  it. 
It  began  business  on  January  7, 1817,  and  on  the  20th  of  the  fol- 

225 


326  HISTORY    OF    BANKING. 

lowing  February  specie  payments  were  resumed  and  the  country 
was  once  more  upon  a  sound  financial  basis. 

In  1819  the  question  of  the  constitutionality  of  the  bank's 
charter  was  definitely  decided  by  the  Supreme  Court  of  the 
United  States  in  the  case  of  the  State  of  Maryland  vs.  McCul- 
loch.  The  United  States  Bank  had  established  a  branch  in 
Baltimore.  The  state  of  Maryland  had  enacted  a  law  that  all 
bank  notes  circulating  within  the  state  must  be  printed  upon 
stamped  paper  for  which  a  tax  must  be  paid  to  the  state.  The 
branch  did  not  use  this  paper  and  declined  to  pay  the  tax, 
whereupon  the  state  brought  suit  for  violation  of  the  laws  of 
Constitutional-  Maryland  against  Cashier  McCulloch  as  the  officer 
unitid  States  ^^  *^®  bank.  The  contention  was  made  that  the 
Bank  Settled  branch  bank  was  without  warrant  of  authority 
under  the  laws  of  the  United  States,  and  that  Congress  had  no 
power  under  the  Constitution  to  create  a  bank.  In  passing 
upon  this  question  the  doctrine  of  implied  powers  was  fully 
established.  Since  Congress  has  the  power  to  lay  and  collect 
taxes,  borrow  money  and  regulate  trade,  it  was  decided  that  it 
had  the  power  "to  make  all  laws  which  shall  be  necessary  and 
proper  for  carrying  into  execution  the  foregoing  powers."  In 
rendering  the  decision  of  the  court  in  this  important  case  Chief 
Justice  Marshall  said,  "It  is  the  unanimous  and  decided  opinion 
of  this  court  that  the  act  to  incorporate  the  Bank  of  the  United 
States  is  a  law  made  in  pursuance  of  the  Constitution.  The 
branches,  proceeding  from  the  same  stock,  and  being  conducive 
to  the  complete  accomplishment  of  the  object,  are  equally  con- 
stitutional," and  hence  the  court  declared  that  they  were  not 
subject  to  any  state  taxes  or  restrictions,  since  their  usefulness 
might  thereby  be  impaired  or  their  existence  even  destroyed. 

In  1819  a  financial  panic  overspread  the  country.  Banks 
and  business  houses  failed  in  large  numbers  and  general  com- 
mercial distress  and  depression  prevailed.  It  leaked  out  that 
irregularities  had  been  practiced  in  the  management  of  the 


SECOND    UNITED    STATES    BANK.  327 

Bank  of  the  United  States,  and  Congress  ordered  an  inv^stiga- 
tion.  A  shameful  state  of  affairs  was  unearthed  and  the  bank 
was  found  to  be  on  the  verge  of  ruin.  The  officials  seemtid  to 
have  been  imbued  with  state  banking  fallacies  and  had  paid  little 

attention  to  the  restrictions  of  their  charter.  They 
Bank  Scandals     had  discouutcd  the  notcs  of  stockholdcrs  on  the 

pledge  of  their  stock  as  security  to  the  amount 
of  over  $8,000,000.  They  had  also  allowed  stock  to  be  sold 
and  transferred  before  it  was  fully  paid  for.  They  even  ad- 
vanced more  than  the  par  value  of  the  stock  in  some  instances. 
Among  the  requirements  of  the  charter  was  one  that  there 
should  be  no  dividends  paid  on  shares  that  were  not  fully  paid. 
This  provision  had  been  repeatedly  violated.  The  president 
and  cashier  of  the  Baltimore  branch  had  helped  themselves  to 
large  amounts  of  money  on  scant  security,  and  withal  the  bank 
was  well  nigh  insolvent.  It  was  saved  from  complete  failure 
by  its  new  president,  who  borrowed  $2,500,000  in  Europe, 
and  took  heroic  measures  to  make  stockholders  pay  up.  From 
this  experience  in  our  banking  history  we  learned  the  lesson 
that  a  bank  should  not  loan  money  on  its  own  shares,  much  less 
those  which  are  not  even  paid  up,  for  in  order  to  realize  on  the 
security  it  must  impair  its  own  capital.  Such  loans  when  in 
default  become  equivalent  to  the  purchase  of  a  bank's  own 
stock  and  that  is  the  same  as  partial  liquidation.  In  a  time  of 
stringency  such  a  practice  will  almost  surely  put  a  bank  in 
jeopardy.  The  Bank  of  the  United  States  got  itself  into  this 
predicament  in  the  panic  of  1819,  and  had  it  not  been  for  the 
loan  secured  in  Europe  and  the  treasury  balance  on  deposit 
there,  it  would  have  been  forced  to  close  its  doors. 

Under  proper  management  the  bank  gradually  regained  its 
wonted  strength,  and  thereafter  controlled  the  financial  system 
of  the  country,  rendering  valuable  service  in  its  capacity  as 
"Eegulator  of  the  Currency,"  and  as  the  fiscal  agent  of  the  gov- 
ernment.   The  people  as  a  whole  regarded  the  institution  as  their 


328  HISTORY    OF    BANKING. 

deliverer  from  the  evils  of  a  debased  money  system,  and,  with  the 
exception  of  a  few  disgruntled  borrowers,  together  with  stock- 
holders whom  the  bank  compelled  to  pay  up,  and  the  state  banks 
who  had  been  forced  to  redeem  their  notes,  it  appeared  to  be 
solid  in  the  confidence  and  good  will  of  the  people.  Imagine, 
then,  the  general  surprise  when  in  1829,  General  Jackson  in 
his  message  attacked  the  bank,  and  declared  that  it  had  "failed 
in  the  great  end  of  establishing  a  uniform  and  sound  currency." 
Jackson's  People  who  knew  anything  about  the  matter  must 

Hostility  to  havc  kuowu  that  this  statement  was  false,  and 

the  Bank  ^^^  ^^  great  was  the  popularity  of  the  old  hero 

that  many  were  willing  to  accept  anything  he  said.  General 
Jackson's  opposition  to  the  bank  could  not  have  been  caused 
by  financial  reasons.  He  was  no  doubt  led  to  believe  that  the 
bank  had  been  hostile  to  his  election  and  he  proposed  to  destroy 
the  "monster."  President  Biddle  of  the  bank  declined  to  allow 
political  affairs  to  influence  or  in  any  way  meddle  with  the 
management  of  the  concern,  and  intimated  that  he  needed  no  ad- 
vice from  the  White  House.  All  of  this  aroused  President 
Jackson's  ire  and  he  became  convinced  that  the  bank  was  a 
giant  monopoly  dangerous  to  the  welfare  of  the  government 
and  people,  and  that  it  was  his  duty  to  destroy  it. 

On  the  other  hand,  the  National  Republican  party,  headed 
by  Clay  and  Webster,  immediately  took  sides  as  defenders  of  the 
bank  against  President  Jackson.  Although  the  bank's  charter 
would  not  expire  until  1836,  a  bill  was  introduced  into  Congress 
in  the  Spring  of  1832  and  passed  for  a  renewal  of  the  charter. 
It  went  to  President  Jackson  in  July  and  he  vetoed  it  with  a 
ringing  document.  President  Biddle  of  the  bank  was  reported  as 
having  said  that  he  would  defeat  President  Jackson  for  re- 
election on  account  of  his  veto  of  the  bank  bill.  This  threat 
aroused  the  General,  and  he  declared  "By  the  Eternal  that  is  too 
much  power  for  any  one  man  to  have  in  this  country,"  and  was 
then  more  than  ever  determined  to  destroy  the  bank.     The 


THE    GREAT    BANK   WAR.  229 

presidential  campaign  was  then  on,  Henry  Clay  being  the  op- 
ponent of  General  Jackson,  and  the  leader  of  the  friends  of  the 
bank.  The  bank  charter  was  the  chief  issue  of  the  campaign,  but 
Jackson's  popularity  was  so  great  that  he  won  re-election  by  an 
overwhelming  majority.  Taking  his  re-election  as 
Banifwal  au  endorsement  of  his  position  on  the  bank  ques- 

tion, President  Jackson  proceeded  to  deal  the 
death  blow  to  what  he  considered  his  enemy.  On  the  pre- 
text that  the  bank  was  unsafe  he  ordered  the  secretary  of  the 
treasury  to  remove  from  it  the  government  deposits,  and  place 
them  in  certain  state  banks.  Secretary  Duane  refused  to  do 
this,  and  Jackson  removed  him  and  appointed  Roger  B.  Taney 
in  his  stead.  Taney  carried  out  the  wishes  of  his  superior.  No 
more  deposits  were  made  in  the  United  States  Bank  and  war- 
rants for  current  expenses  soon  exhausted  the  government  bal- 
ance there. 

The  government  funds  were  then  deposited  with  state  banks 
carefully  selected  with  reference  to  party  loyalty.     This  raised 
a  storm  of  protest  from  Jackson's  political  op- 
Removcd  poucnts,  who  branded  the  proceeding  as  unlawful, 

being  a  violation  of  the  contract  under  which  the 
bank  came  into  existence.  The  bank  had  paid  $1,500,000  as  a 
bonus  for  the  government  deposits  during  a  period  of  twenty 
years  and  now  it  was  deprived  of  the  benefits  of  these  deposits 
three  years  before  the  expiration  of  the  time.  Party  feeling 
ran  high,  and  in  the  ensuing  Congress  a  resolution  of  censure 
was  passed  by  both  houses  as  follows:  Resolved,  that  the  presi- 
dent, in  the  late  proceeding  in  relation  to  the  public  revenue, 
has  assumed  upon  himself  authority  and  power  not  conferred  by 
the  constitution  and  laws  but  in  derogation  of  both."  The 
president  protested  against  the  proceeding,  but  the  resolution 
stood  upon  the  records  until  1837,  when  it  was  expunged  in  an 
all-night  session  of  the  Senate,  after  a  fierce  party  struggle. 
The  withdrawal  of  the  deposits  was  a  serious  blow  to  the 


330  HISTORY    OF    BANKING. 

Bank  of  the  United  States,  but  it  continued  on  until  the  expira- 
tion of  its  charter  in  1836.  It  then  took  out  a  charter  as  a  state 
bank,  and  continued  business  until  1841,  when  it  failed.  Nicho- 
las Biddle  was  reduced  from  wealth  to  pauperism.  Thus  ended 
the  great  bank  war,  in  a  triumph  for  President  Jackson.  Specie 
payments  were  suspended  again  in  1837,  the  only  retaliation 
against  Jackson^s  victory,  and  the  country  was  again  to  struggle 
for  a  time  with  state  banks  and  wildcat  currency. 

The  state  banks  in  existence  in  1833,  when  Andrew  Jackson 
transferred  the  deposits  to  them,  were  of  all  kinds,  based  upon 
every  conceivable  system  and  form  of  legislation.  It  seemed  as 
though  the  period  of  nearly  thirty  years  just  prior  to  the  enact- 
ment of  our  National  Banking  Act  was  to  be  used  for  testing 
every  theory  and  making  every  experiment  that  could  be  neces- 
sary in  order  to  culminate  finally  in  the  national  banking  system. 
The  banks  in  Massachusetts  were  the  best  managed.  Being 
under  severe  restrictions,  and  a  penalty  in  case  of  failure  to  pay 
specie  on  demand,  they  were  the  most  stable.  The  "Suffolk 
Bank  System"  of  Boston  also  acted  as  a  powerful  check  against 
improvident  management.  This  system  arose  from  the  deter- 
mination of  the  solvent  banks  of  Boston  to  compel  the  smaller 
ibanks  located  in  the  remote  corners  of  the  state  to  redeem  their 
notes  by  keeping  on  deposit  in  Boston  a  fund  for  this  purpose. 
The  notes  were  presented  daily  through  a  clear- 
sy^em^^"^  iug  housc,  in  very  much  the  same  way  as  checks 
are  cleared.  Any  bank  refusing  to  keep  a  fund 
for  this  purpose  was  liable  to  have  its  notes  thrown  out  or  re- 
fused, and  thus  be  discredited.  This  system,  which  at  one  time 
included  over  five  hundred  banks,  served  to  restrict  note  issues 
and  proved  a  valuable  expedient  for  the  time  being. 

In  New  York  the  "Safety  Fund  System"  was  established,  by 
which  each  bank  was  required  to  deposit  with  the  state  treasurer 
three  per  cent,  of  its  capital  as  a  fund  for  the  security  of  note 
holders  and  depositors.     In  case  the  fund  became  exhausted 


IN    NEW   ENGLAND.  231 

all  the  solvent  banks  were  to  be  taxed  to  replete  it.    The  fund 
was  afterwards  set  aside  for  the  protection  of  note  holders  only, 

it  having  been  found  wholly  insufficient  to  protect 
sylVem^"'"*         both  notc  holdcrs  and  depositors.     The  "Safety 

Fund  System"  resembled  in  many  respects  the 
present  Canadian  banking  system,  which  has  a  safety  fund  of 
five  per  cent,  as  a  protection  for  note  holders.  Other  expedients 
were  tried  in  various  states.  In  some  of  them  the  state  had  a 
voice  in  the  management  of  the  banks  and  in  others  it  was  a 
sharer  in  the  profits.  Thus  the  country  went,  feeling  its  way, 
until  the  panic  in  1837  caused  hundreds  of  banks  to  fail,  no 
doubt  covering  up  many  an  instance  of  defalcation  and  dis~ 
honesty.  That  panic  proved  that  the  safety  fund  system  of 
New  York  was  wholly  inadequate,  and  that  state  then  adopted 

the  "Free  Banking  System,"  which  permitted  any- 
system*'^^^'*^       ouc  to  form  a  bank  and  issue  notes  without  a 

charter  from  the  legislature,  as  had  been  the 
custom  in  the  past.  The  notes  must  be  based,  however,  upon 
either  United  States  bonds  or  bonds  of  the  State  of  New  York, 
or  approved  real  estate  security,  deposited  with  the  state  treas- 
urer. In  case  of  the  failure  of  a  bank  the  state  treasurer  was 
authorized  to  sell  the  securities  and  apply  the  proceeds  to  the 
redemption  of  the  outstanding  notes  of  the  bank.  Other  states 
copied  after  the  free  banking  system  of  New  York,  and  it 
became  very  popular.  The  merits  of  the  system  depended  chiefly 
upon  the  quality  of  the  securities  and  the  convertibility  of  them 
in  a  time  of  stringency.  Real  estate  mortgages  were  subject  to 
great  depreciation  and  at  forced  sale  bonds  often  brought  much 
less  than  their  face  value. 

In  some  other  states  no  adequate  attempt  was  made  to  pro- 
tect the  note  circulation  or  supervise  the  banking  system,  and 
the  result  was  a  large  number  of  banks  of  the  most  irresponsible 
character,  many  of  them  permeated  with  dishonesty,  so  bad  as  to 
win  the  title  of  Wild  Cat  Banks.    Senator  Sherman,  in  his  "Eec- 


332  HISTORY    OF    BANKING. 

ollections,"  referring  to  wild  cat  banking  in  the  40's  and  50s, 
says:    "We  had  every  diversity  of  the  bank  system  devised  by  the 
wit  of  man,  and  all  these  banks  had  the  power  to 
Banking*  "^^^^^  paper  money.     There  was  no  check  or  con- 

trol over  them."  Manifold  evils  resulted  from 
this  want  of  uniformity  and  of  public  regulation.  Coun- 
terfeiters plied  their  dishonest  practices  to  an  alarming  extent, 
and  there  were  5,400  spurious  notes  catalogued  as  being  in 
circulation  at  one  time.  "Counterfeit  Detectors"  and  "Bank 
Note  Keporters"  were  important  publications  to  which  bankers 
and  merchants  subscribed,  in  order  to  be  posted  on  the  spurious 
bills  in  circulation.  Disputes  between  buyer  and  seller  as  to  the 
goodness  of  the  bank  notes  were  of  almost  constant  occurrence, 
and  if  there  was  a  bank  in  the  town  the  cashier  was  constantly 
appealed  to  for  his  opinion  on  the  genuineness  of  *  notes  in 
circulation. 


CHAPTER  XXIV. 

BANKING  IN  THE  UNITED  STATES. 

NATIONAL   BANKING   SYSTEM;    ORGANIZATION;    RESERVE; 
CIRCULATION;  SUB-TREASURY  SYSTEM. 

When  the  Civil  "War  broke  upon  the  country  it  found  the 
national  government  illy  prepared  to  meet  the  enormous  expendi- 
tures which  a  war  entails.  The  treasury  was  almost  empty,  and 
yet  vast  amounts  of  money  were  needed  at  once.  Gold  had  been 
hoarded  and  exported  in  anticipation  of  war  to  such  an  extent 
that  in  the  winter  of  1861  the  banks  suspended  specie  payment. 
This  left  no  circulating  medium  except  the  state  bank  notes.  In 
1862  and  1863  the  government,  to  relieve  the  situation,  issued 
$450,000,000  of  government  notes,  called  "greenbacks,"  with 
which  it  purchased  the  munitions  of  war  and  paid  its  expenses, 
but  depreciation  set  in  and  further  issues  of  such  notes  were 

stopped.  It  then  became  necessary  for  the  govem- 
u.  s.  Bonds         ment  to  borrow  money,  and  issue  its  obligations  in 

the  form  of  bonds.  In  order  to  find  a  market  for 
those.  Secretary  Chase,  of  the  treasury  department,  proposed  to 
offer  as  an  inducement  to  their  purchase  certain  banking  priv- 
ileges. He  worked  out  the  scheme  of  our  national  banking 
system  and  urged  the  organization  of  national  banks,  first  in 
his  report  of  December,  1861,  and  again  in  1862.  The  chief 
points  of  advantage  in  his  scheme  were  that  it  would  create  a 
demand  for  government  bonds,  in  return  for  which  the  national 
treasury  would  receive  large  amounts  of  much  needed  cash, 
and  second  it  would  give  the  country  a  safe,  uniform  and  stable 
note  circulation.  After  much  consideration  Congress  passed 
the  National  Banking  Act,  and  in  February,  1863,  it  received  the 
president's  signature  and  became  a  law. 


234  HISTORY    OF    BANKING. 

The  original  act  was  crude  and  unsatisfactory  and  has  been 
often  amended,  but  the  general  features  of  the  system  remain. 
In  1864  an  amendment  was  made  forbidding  national  banks  from 
making  loans  on  landed  security,  which  had  been  permitted  by 
the  original  act.  The  law  was  so  framed  as  to  enable  state  banks 
to  become  members  of  the  national  system  by  the  simple  process 
of  conversion  without  reorganization.  Every  inducement  was 
made  to  the  state  banks  to  lead  them  into  the  system,  but  they 
were  slow  to  make  the  change.     On  March  3,  1865,  a  law  was 

enacted  imposing  a  ten  per  cent,  tax  per  annum 
Stete  Banks°^       upon  the  notc  issues  of  all  state  banks.    This  was 

a  death  blow,  as  it  was  intended  to  be,  and  drove 
the  state  bank  notes  out  of  existence,  leaving  the  field  clear  to 
the  national  bank  circulation.  Following  this  law  the  state 
banks  rapidly  came  into  the  national  system,  and  on  the  first 
af  January,  1867,  there  were  $391,093,294  of  national  bank 
notes  in  circulation.  The  large  increase  in  the  number  and 
capital  of  the  national  banks  meant  an  increased  demand  for 
government  bonds,  which  in  turn  meant  vast  receipts  of  cash 
to  the  government  treasury.  Government  bonds  had  been  pre- 
viously selling  at  7  per  cent,  discount.  The  demand  raised 
their  price  above  par  and  thus  the  system  proved  of  the  greatest 
assistance  to  the  government. 

But  the  10  per  cent,  tax  which  virtually  made  state  bank 
issues  unprofitable  and  hence  impossible,  aroused  considerable 
opposition  on  the  part  of  the  state  bankers.  Congress  was 
accused  of  overstepping  its  constitutional  limitations  in  its  at- 
tempt to  interfere  with  state  institutions.  Suit  was  brought  by  a 
bank  in  Maine  to  recover  the  tax  which  it  had  paid,  and  in  the 

brief  submitted  to  the  United  States  Supreme 
urofthe  Law      ^^ourt,  the  contention  was  made  that  the  state  had 

a  right  to  charter  a  bank  and  empower  it  to  issue 
circulating  notes.  This  right  had  been  exercised  by  all  of  the 
states  from  the  foundation  of  the  republic,  without  objection 


NATIONAL    BANK    ACT.  235 

or  interference  from  Congress.  It  had  been  recognized  and 
upheld  by  the  Supreme  Court  itself  in  a  previous  case.  Now  to 
subject  the  bank  to  a  tax  of  ten  per  cent,  was  virtually  to  destroy 
this  right,  and  thus  encroach  upon  the  prerogatives  of  the  state 
in  a  manner  unwarranted  by  the  Constitution.  The  court 
decided  that  "Congress  had  the  undisputed  power  to  provide  a 
currency  for  the  entire  republic,  and  that  in  the  exercise  of  that 
power  it  might,  if  it  saw  fit,  by  taxation  or  otherwise  restrain 
the  circulation  of  any  notes  not  issued  by  its  immediate  author- 

ity." 

Thus  was  formed  a  national  banking  system  infinitely  more 
powerful  than  the  bank  which  Jackson  waged  a  war  upon,  on 
account  of  his  belief  that  it  concentrated  too  much  power  in  the 
hands  of  a  few  men,  but  a  system  which  has  proven  all  of  Jack- 
son's fears  to  be  groundless.  The  favoring  conditions  in  the 
formation  of  the  national  banking  system  were  the  stress  of  war, 
and  the  assumption  of  implied  powers  by  the  government  made 
necessary  in  order  to  carry  on  its  struggle  for  existence. 

The  principal  features  of  the  national  banking  system  are 
as  follows: 

A  currency  bureau  has  been  established  as  a  department  of  the 
treasury,  under  the  management  of  an  oflScer  called  the  Comp- 
troller of  the  Currency.  This  bureau  is  charged  with  the  execu- 
tion of  the  banking  law  and  the  regulation  of  all  details  of  the 
organization  and  management  of  national  banks,  the  issue  to 
such  banks  upon  receiving  their  deposits  of  United 
Bureau*^^  States  bonds,  the  appointment  and  supervision  of 

inspectors  of  banks,  etc.  The  Comptroller  must 
not  be  interested  in  any  national  bank  either  directly  or  indi- 
rectly. He  must  make  an  annual  report  to  Congress  of  the 
conditions  of  all  national  banks. 

At  least  five  persons  are  necessary  to  form  a  national  bank. 
Articles  of  association  setting  forth  all  of  the  details  concerning 
the  proposed  bank,  its  name,  place  of  business,  capital,  etc.,  are 


236  HISTORY    OF    BANKING. 

signed  by  the  five  stockholders  and  transmitted  to  the  Comp- 
troller at  Washington,  who,  upon  approving  them  and  satisfying 
himself  as  to  payment  of  the  capital  and  compliance  with  other 
Organization  requirements  of  the  law,  issues  a  charter  for  twenty 
of  National  years.     This  charter  may  be  renewed  for  a  like 

term  of  twenty  years.  The  law  authorizes  national 
banks  to  exercise  by  its  board  of  directors  or  duly  authorized 
officers  or  agents,  subject  to  law,  all  such  incidental  powers  as 
shall  be  necessary  to  carry  on  the  business  of  banking;  by  dis- 
counting and  negotiating  promissory  notes,  drafts,  bills  of  ex- 
change and  other  evidences  of  debt;  by  receiving  deposits;  by 
buying  and  selling  exchange,  coin  and  bullion;  by 
BuSness*^^  loaning  money  on  personal  security,  and  by  ob- 

taining, issuing  and  circulating  notes."  But  they 
are  not  permitted  to  loan  money  on  real  estate  security  or  hold 
real  estate  except  such  as  is  necessary  for  the  conduct  of  ^he 
business,  or  may  have  been  acquired  in  liquidation  of  previous 
obligations,  and  then  only  until  it  can  be  disposed  of  without 
sacrifice. 

The  affairs  of  the  national  banks  are  managed  by  a  board  of 
not  less  than  five  directors,  elected  annually  by  the  stockholders, 
as  in  the  case  of  other  corporations,  except  that  all  directors 
of  national  banks  must  be  American  citizens,  and  own  at  least 
ten  shares  of  stock.  Stockholders  are  under  the 
stockholders  ^^doublc  liability"  obligation,  i.  e.  every  stockholder 
is  liable  for  all  of  the  debts  and  liabilities  of  the 
bank  to  the  extent  of  the  amount  of  the  par  value  of  his  stock 
and  as  much  more  besides'. 

At  least  one-half  of  the  capital  stock  must  be  paid  in  before 
beginning  business  and  the  balance  in  five  equal  monthly  install- 
ments. The  amount  of  the  capitalization  of  the  bank  is  also  con- 
trolled by  law,  and  depends  upon  the  population  of  the  town  or 
city  in  which  the  bank  is  to  be  located.  In  cities  of  3,000  or 
less  population  the  capital  must  not  be  less  than  $25,000,  in 


NATIONAL    BANK   ACT.  237 

cities  of  more  than  3,000  and  less  than  6,000  the  capital  must  be 
not  less  than  $50,000,  in  cities  of  more  than  6,000  and  less  than 

50,000  the  capital  must  be  not  less  than  $100,000, 
Capital  and  in  cities  of  50,000  or  over  it  must  be  not 

less  than  $200,000.  A  bank  with  a  capital  of 
$150,000  or  less  must  deposit  with  the  Treasurer  of  the  United 
States  government  bonds  equal  to  one-fourth  its  capital.  A  bank 
with  a  greater  capital  must  deposit  at  least  $50,000  in  bonds. 
These  bonds  may  be  used  as  a  basis  for  circulating  notes  or  not, 
according  to  the  option  of  the  bank.  No  bank  is  compelled  to 
issue  notes. 

A  national  bank  may  issue  circulating  notes  to  the  amount  of 
90  per  cent,  of  the  par  value  of  the  government  bonds  deposited 
with  the  Treasurer  of  the  United  States.*  The  Comptroller 
furnishes  suitable  notes,  in  blank,  in  denominations  of  $5,  $10, 
$20,  $50,  $100,  $500  and  $1,000,  and  these  when  signed  by  the 

officers  of  the  bank  are  ready  for  issue  over  the 
Circulation  bank's  couutcr.     Bank  notes  are  receivable  in  all 

parts  of  the  United  States  in  payment  of  taxes, 
excises,  public  lands,  and  all  other  dues  to  the  United  States 
except  duties  on  imports  and  interest  on  the  public  debt. 

Each  national  bank  is  required  to  keep  on  deposit  with  the 
Comptroller  of  the  currency  a  deposit  equal  to  five  per  cent,  of 
its  circulation,  as  a  fund  for  the  redemption  of  its  worn  out  or 
mutilated  notes.  When  notes  become  worn,  defaced  or  mutilated 
so  that  they  are  no  longer  fit  for  circulation  they  will  be  replaced 
with  new  notes  by  the  Comptroller.  The  old  notes  are  then 
"macerated"  or  destroyed  by  the  process  of  grinding  them  to  a 
pulp.  Whenever  the  redemption  of  notes  for  any  bank  amounts 
to  $500  it  is  called  upon  to  replenish  its  deposit. 

Any  bank  desiring  to  reduce  its  volume  of  circulating  notes 
may  do  so  by  paying  into  the  United  States  treasury  either  the 


*This  was  the  original  provision  of  the  law,  but  by  the  Act  of  1890  the 
limit  was  raised  to  the  par  value  of  the  bonds  deposited. 


238  HISTORY    OF    BANKING. 

notes  themselves  or  a  sum  of  lawful  money  with  which  the  Comp- 
troller may  redeem  them,  and  a  corresponding  amount  of  gov- 
ernment bonds  will  then  be  released  from  deposit 
Sl^cu?adr^°^  and  returned  to  the  bank.  To  prevent  any  sud- 
den or  serious  contraction  of  the  currency  of  the 
country,  the  law  prescribes  that  not  more  than  $3,000,000  of 
notes  shall  be  retired  by  all  of  the  banks  in  any  one  month.  Of 
course  no  bank  can  withdraw  bonds  below  the  minimum  required 
to  be  deposited  irrespective  of  circulation.  Certain  enumerated 
cities  in  various  parts  of  the  country  are  denominated  "reserve 
cities,^'  among  which  are  'New  York,  Chicago,  Boston,  Cincin- 
nati, Baltimore,  Albany,  Cleveland,  Detroit,  Philadelphia,  St. 
Louis,  San  Francisco,  Milwaukee,  Louisville  and  Washington. 
The  banks  in  these  cities  are  required  to  keep  on  hand  a  sum 
of  money  equal  to  25  per  cent,  of  their  deposits.  Banks  in  other 
cities  are  required  to  keep  a  reserve  of  15  per  cent.,  but  three- 
fifths  of  this  may  consist  of  deposits  with  banks 
Reserve  in  Tcscrve  citics.     The  five  per  cent,  redemption 

fund  on  deposit  with  the  Comptroller  may  be 
counted  as  a  part  of  the  reserve.  When  a  bank's  cash  falls  below 
the  reserve  limit,  it  is  forbidden  to  increase  its  liabilities  by 
making  new  loans  or  discounts,  or  to  declare  further  dividends 
until  the  cash  reserve  is  restored.  Failure  to  restore  the  reserve 
may  subject  the  bank  to  forced  liquidations  at  the  discretion  of 
the  Comptroller. 

The  safety  of  the  banks  is  guarded  by  the  law  through  a 
number  of  wholesome  restrictions,  among  which  are,  that  no 
real  estate  acquired  under  judgment  decrees  or 
Restrictions  mortgages  may  be  held  for  more  than  five  years. 
N"ot  more  than  one-tenth  of  the  capital  of  the 
bank  may  be  loaned  to  one  individual,  corporation  or  firm, 
directly  or  indirectly,  nor  may  any  bank  lend  money  on  its  own 
shares,  but  they  may  be  taken  as  security  for  a  debt  previously 
contracted  in  good  faith.     Unearned  dividends  must  not  be 


NATIONAL    BANK   ACT.  339 

declared.  If  the  capital  is  impaired  by  losses,  the  deficit  must  be 
made  good  by  an  assessment  on  the  shareholders  if  necessary. 
One-tenth  of  the  net  profits  must  be  annually  added  to  the  sur- 
plus fund  until  the  fund  shall  amount  to  20  per  cent,  of  the 
capital. 

Every  national  bank  is  required  to  make  not  less  than  five 
reports  of  its  condition  each  year  to  the  Comptroller,  verified 
by  the  oath  of  the  president  or  cashier  and  the  signatures  of  at 
least  three  directors.     In  addition  to  this  special  reports  as  to 

dividends  and  earnings  are  made  each  half  year. 
Exan^ners  Reports  are  usually  called  for  a  prior  date,  so  as 

to  give  bank  officials  no  opportunity  to  patch  up 
affairs.  As  a  further  safeguard,  bank  examiners  are  employed 
by  the  Comptroller,  whose  duty  it  is  to  make  a  thorough  exam- 
ination of  the  affairs  of  all  national  banks,  inspect  books,  securi- 
ties, assets  and  liabilities,  and  report  the  results  of  such  finding 
to  the  Comptroller. 

The  Comptroller  also  has  charge  of  the  settling  up  of  the 
affairs  of  failed  national  banks.  He  appoints  the  receivers  and 
fixes  their  compensation.  All  money  received  for  the  assets  of 
the  bank  is  turned  over  to  him  and  he  pays  out  dividends  to 

creditors.  The  Comptroller  also  declares  the  bonds 
Failed  Banks*       ^^^^  ^^^  sccurity  of  circulation  forfeited,  and  gives 

notice  to  the  holders  of  all  notes  of  the  defunct 
bank  to  present  them  at  the  treasury  for  payment. 

In  the  early  days  of  the  national  banking  system  circulation 
was  extremely  profitable.  Government  bonds  bore  five  and  six 
per  cent,  interest  and  kept  constantly  increasing  in  value,  and 
this,  added  to  the  profits  on  circulation  issued  against  the  bonds, 
acted  as  a  strong  inducement  to  the  organization  of  national 
banks.  In  consequence  of  this  increase  in  the  number  of  banks 
of  issue  the  volume  of  bank  notes  constantly  rose  until  in  Decem- 
ber, 1874,  it  amounted  to  $354,394,346.  From  this  point  it 
experienced  a  slight  falling  off  until  in  1883  it  reached  high 


240  HISTORY    OF    BANKING. 

water  mark  in  a  volume  of  $362,651,169.  The  retirement  of 
bonds  by  the  government  and  refunding  them  at  lower  rates 
of  interest  then  acted  to  reduce  the  volume  of  circulation  and 
Volume  of  ^^  ^^^  ^^^^  ^^  ^^^^  ^^  $167,927,974.    Since  then 

Bank  Note  it  has  showu  increascs  whenever  there  have  been 

Circulation  ^^^  .g^^^g  ^^  ^^^^^     rpj^^  ^^^  ^f  -^^qq  permitted 

banks  to  issue  notes  to  the  amount  of  the  paid  in  capital  and  to 
100  per  cent,  of  the  market  value  of  the  bonds  deposited,  pro- 
vided this  did  not  exceed  their  par  value.  The  tax  on  circulation 
was  reduced  from  one  to  one-half  per  cent,  and  the  effect  has 
been  an  increase  in  the  volume  of  bank  note  circulation. 

It  will  thus  be  seen  that  the  aggregate  circulation  depends 
approximately  upon  the  current  price  of  bonds  and  not  upon  the 
demands  of  business.  When  it  is  profitable  to  issue  notes  the 
banks  do  so,  and  when  the  market  price  of  bonds  insures  to 
their  owners  better  profits  than  by  the  deposit  of  them  to  secure 

circulation,  then  the  banks  contract  their  circula- 
the  CuJrem:y^       ^^°^-    ^^  ^^^^  happens  that  frequently  when  there 

is  the  greatest  need  of  a  large  circulation  in  order 
to  carry  on  the  business  of  the  country,  the  price  of  bonds  makes 
it  advantageous  to  the  banks  to  reduce  the  volume  of  their  notes, 
and  surrender  their  circulation.  This  is  one  of  the  serious 
defects  of  our  currency  system.  Eeal  elasticity,  whether  of 
contraction  or  expansion,  to  adapt  its  volume  to  the  needs  of 
business  is  unknown  under  this  system.  But  were  expansion 
and  contraction  even  possible  under  our  system,  it  would  be  too 
slow  and  cumbersome  to  meet  the  requirements  of  business. 
Bonds  must  be  sent  to  Washington,  notes  must  be  printed,  for- 
warded and  signed,  all  entailing  a  delay  of  several  weeks,  beford 
the  money  is  ready  for  circulation.  A  money  stringency  might 
arise,  produce  its  unfortunate  results  and  subside  before  the 
needed  relief  could  be  obtained  through  the  channel  of  the  ex- 
pansion of  bank  note  circulation. 

The  sub-treasury  system  of  the  United  States  seems  to  ag- 


SUB-TREASURY.  241 

gravate  rather  than  correct  the  shortcomings  of  our  bank  note 
circulation,  by  locking  up  in  the  vaults  and  thus  withdrawing 
from  circulation  many  millions  of  dollars  more  than  the  govern- 
ment requires  to  meet  its  current  obligations  just  at  a  time  when 
it  is  most  needed  in  circulation.  Under  our  system  of  indirect 
taxation  this  locking  up  of  money  proceeds  at  a  greater  rate 
when  business  is  prosperous  and  a  larger  volume  of  currency  is 
needed  in  the  channels  of  trade  than  when  business 
Sub-Treasury       -^  ^^ji    £^^  ^j^^  icasou  that  in  activc  times  im- 

oystem  ' 

portations  are  greater  and  the  consumption  of 
those  luxuries  which  are  taxed  under  the  internal  revenue  law 
is  greater,  thus  increasing  the  government  receipts  both  from 
customs  and  internal  revenues. 

A  system  of  asset  banking  somewhat  after  the  Canadian 
method  has  been  advocated  for  the  United  States  as  a  relief 
from  the  objections  to  the  sub-treasury  system  and  the  fast  and 
hard  rules  of  the  National  Banking  Act.  Certain  it  is  that  we 
need  a  more  elastic  circulating  medium,  and  it  is  almost  equally 
certain  that  a  system  of  branch  banking  would  be  a  decided 
advantage  to  the  country.  The  National  Banking  Act  has  served 
the  country  so  long  and  well  that  there  is  a  reluctance  to  dis- 
place it,  but  there  is  also  a  strong  feeling  that  reform  is  needed 
in  our  currency  system  to  adapt  it  to  changing  conditions. 

In  order  to  maintain  the  country  upon  a  specie  basis  it  is 
necessary  for  the  United  States  treasury  to  keep  a  large  specie 
reserve  on  hand.  The  amount  of  this  reserve  has  been  fixed  at 
$150,000,000.*  Under  the  "parity"  clause  of  the 
Resi^f  ^^*  0^  1^^^  ^*  ^^^s  declared  to  be  the  policy  of  the 

United  States  to  maintain  the  two  metals  (gold 
and  silver)  on  a  parity  with  each  other.  In  order  to  do  this,  when 
treasury  notes  are  presented  for  payment,  they  are  paid  in  either 
gold  or  silver,  as  the  holder  demands.     In  the  spring  of  1893 


♦This  amount  was  originally  $100,000,000,  but  was  increased  in  1900  to 
$150,000,000. 


242  HISTORY    OF    BANKING. 

the  reserve  in  the  treasury  fell  below  the  $100,000,000  mark, 
owing  to  large  exportations  of  gold.  By  the  following  January 
the  reserve  had  fallen  to  $65,650,000,  and  a  feeling  of  fear 
spread  over  the  country  lest  the  treasury  should  be  unable  to 
maintain  the  reserve  and  values  should  go  to  a  silver  basis. 
The  Secretary  of  the  treasury  sold  $50,000,000  gold  bonds  on 
about  a  three  per  cent,  basis  and  replenished  the  reserve.  The 
redemption  of  notes  continued,  however,  and  by  the  following 
August  (1894)  the  reserve  had  fallen  to  $52,000,000.  In  the 
following  November  another  issue  of  $50,000,000  was  made  to 
restore  the  reserve.  In  January,  1895,  $65,000,000  more  of  gold 
bonds  were  negotiated  and  the  proceeds  placed  in  the  reserve, 
and  in  February,  1896,  a  fourth  issue  of  $100,000,000  of  bonds 
was  resorted  to,  which  served  to  maintain  the  reserve  until  the 
tide  turned  and  gold  began  to  flow  into  instead  of  from  the 
United  States  treasury.  This  process  of  redeeming  treasury 
notes  in  gold  and  issuing  them  again  only  to  have  them  in  turn 
presented  for  redemption  in  gold  again,  was  called  "the  oper- 
ation of  the  endless  chain.^^ 

Prior  to  1861  no  notes  not  bearing  interest  were  issued  by 
the  United  States  treasury,  but  on  July  17,  1861,  Congress 
directed  the  issue  of  $50,000,000  of  demand  notes  in  denomina- 
tions of  less  than  $50  in  exchange  for  coin  or  in  payment  of 
debts  due  the  government.  These  were  the  first  "sinews  of  war" 
in  the  form  of  "greenbacks."  The  act  of  February  25,  1862, 
increased  the  issue  to  $150,000,000.  These  notes  were  a  legal 
tender  for  all  debts  public  and  private  except  customs  duties 
and  interest  on  the  public  debt.  On  June  11,  1862,  Congress 
increased  the  issue  to  $300,000,000  and  on  March  3,  1863,  to 

$450,000,000.  After  the  war  Congress  gradually 
Notes    ****^       reduced  the  volume,  but  by  the  act  of  April  12, 

1866,  limited  the  retirement  to  $10,000,000  month- 
ly for  six  months  and  $4,000,000  monthly  thereafter.  Dur- 
ing the  panic  of  1873  the  retirement  of  notes  was  discontinued 


UNITED    STATES    NOTES.  243 

and  the  volume  outstanding  increased  by  nearly  $27,000,000, 
bringing  the  total  up  to  $382,979,815.  But  the  act  of  January, 
1875,  provided  for  further  reduction,  and  declared  that  on 
January  1,  1879,  specie  payment  should  be  resumed.  In  order  to 
prepare  for  the  resumption  of  specie  payments  it  was  deemed 
wise  in  May,  1878,  to  prohibit  the  further  cancellation  of  "green- 
backs" and  the  amount  has  therefore  stood  ever  since  at  $346,- 
681,016,  as  it  was  at  the  close  of  business  on  the  day  the  act 
went  into  effect. 

The  secretary  was  authorized  by  the  act  of  March  3,  1863» 
to  receive  deposits  of  gold  coin  and  bullion  and  to  issue  therefor 
certificates  in  denominations  of  $20  and  upward,  payable  on 
demand.  The  coin  was  to  be  held  in  the  treasury  for  the  re- 
demption of  the  certificates.  There  were  in  circulation  on  July 
1,  1901,  gold  certificates  amounting  to  $247,036,359.  These 
certificates  are  not  a  legal  tender  but  are  receivable  for  customs^ 
taxes  and  all  public  dues.  They  are  also  available  for  the 
reserves  of  national  banks. 

Silver  certificates  are  issued  upon  deposits  of  silver  dollars, 
under  the  act  of  February  28,  1878,  which  authorized  the  coin- 
age of  the  dollars.  At  first  all  deposits  were  limited  to  $10  or  a 
multiple  thereof,  and  certificates  were  issued  only 
?ertificat!r''  in  ^ike  denominations,  but  the  act  of  1886  pro- 
vided that  certificates  might  be  issued  in  denomina- 
tions of  $1,  $2  and  $5.  The  issue  is  limited  to  the  amount  of 
silver  actually  deposited  in  the  treasury.  The  certificates  are 
not  a  legal  tender,  but  may  be  held  by  national  banks  as  a  part 
of  their  reserves.  The  volume  of  silver  certificates  outstanding 
on  Julv  1,  1901,  was  $429,643,556. 


CHAPTER  XXV. 

BANKING  IN  THE  UNITED  STATES. 

STATE  BANKS;  PRIVATE  BANKS;  SAVINGS  BANKS; 
TRUST   COMPANIES. 

A  large  number  of  banks  exist  and  flourish  under  state  regu- 
lations. Many  of  them  were  organized  and  engaged  in  business 
prior  to  the  formation  of  our  national  banking  system  and  de- 
clined to  enter  that  system,  but  the  larger  portion  have  since 
been  organized  from  time  to  time  to  meet  the  real  or  supposed 
needs  for  better  banking  facilities  in  the  communities  in  which 
they  are  located.  As  previously  stated,  by  an  amendment  to 
the  National  Banking  Law  in  July,  1866,  the  government  im- 
posed a  tax  of  ten  per  cent,  upon  the  note  circulation  of  all 
state  banks.  The  purpose  of  the  tax  was  to  drive  the  state  bank 
notes  out  of  circulation  and  thus  make  room  for  the  national 
bank  currency,  and  it  accomplished  its  purpose  perfectly.  In 
other  respects,  however,  the  state  banks  were  unaffected  and  have 
continued  to  do  business  in  the  same  way,  subject  only  to  the 
regulations  imposed  by  the  laws  of  the  states  in  which  they  are 
situated.  A  state  bank  discounts  notes  and  drafts,  receives 
deposits,  buys  and  sells  exchange  and  performs  all  the  regular 
functions  of  any  bank.  Its  internal  mechanism  and  organization 
of  officers  and  clerks  is  substantially  the  same  as  those  of  a 
national  bank.  The  state  laws  usually  require  a  directory  of 
five  or  more  persons  to  manage  the  affairs  of  the  bank,  and  it 
must  be  a  regularly  organized  corporation,  formed  and  conducted 
in  compliance  with  the  statute. 

While  national  banks  are  usually  considered  as  possessing 
decided  advantages  over  state  institutions,  the  latter  in  turn 
have,  in  the  opinion  of  some  bankers,  decided  advantages,  among 

244 


STATE    BANKS.  245 

which  may  be  mentioned:  They  are  not  subject  to  such  severe 
restrictions  as  to  capital,  reserve,  etc.;  are  not  examined  so  criti- 
cally; are  not,  in  many  states,  required  to  make 
stair  Banks °  rcports  or  returns;  have  greater  liberty  in  the 
making  of  loans,  and  may  certify  checks  in  excess 
of  the  amount  which  the  depositor  has  on  deposit.  This  latter 
right  is  strictly  and  rigidly  denied  to  national  banks,  and  at  first 
thought  would  seem  to  be  only  a  wholesome  restriction  as  applied 
to  any  bank,  but  in  certain  classes  of  transactions,  notably  those 
connected  with  the  stock  exchange,  it  may  be  necessary  for  a 
bank  to  certify  in  excess  of  the  deposit.  While  the  practice  is 
clearly  objectionable  it  may  be  necessary  under  certain  con- 
ditions. The  banking  laws  of  the  different  states  are  very  dis- 
similar and  produce  the  same  variety  in  the  character  of  the 
banks  formed  under  them,  so  that  in  order  to  understand  the 
requirements  and  restrictions  under  which  state  banks  exist,  it 
will  be  necessary  to  consult  the  statutes  of  the  different  states. 
Next  lower  in  the  order  of  size  and  importance  come  the 
private  banks.*  These  differ  from  state  banks,  being  usually 
not  corporations  with  a  fixed  capital  divided  into  shares  and  con- 
trolled by  a  board  of  directors,  but  having  an 
Private  Banks  indefinite  Capital  owned  entirely  by  one  or  more 
persons.  The  stockholders  in  a  state  bank  are 
limited  in  their  liability  to  the  bank,  but  in  the  case  of  a  private 
bank  the  owners  or  stockholders  (in  case  of  a  stbck  company) 
are  individually  responsible  for  the  liabilities  of  the  bank  without 
limit.  Private  banks  usually  grow  out  of  favoring  conditions. 
In  a  town  too  small  to  justify  the  organization  of  a  national 
bank  with  a  capital  of  $25,000,  and  yet  needing  banking  facili- 
ties, a  leading  merchant  who  is  well  known  as  a  responsible  man, 
decides  to  open  a  bank  as  an  annex  to  his  store.  His  bank 
commands  the  confidence  of  the  public,  on  account  of  his  repu- 

*In  1902  there  were  1,302  state  banks  in  the  United  States,  according 
to  the  Comptroller's  repoiTtf 


246  HISTORY    OF    BANKING. 

tatiou  for  wealth,  character  and  honesty.  Or  some  man  who 
is  in  the  habit  of  buying  notes  or  making  small  loans  at  remuner- 
ative rates,  finally  concludes  to  enlarge  his  office,  and  hangs  out 
his  sign  as  a  banker.  The  capital  of  a  private  banker  may  be 
small,  but  he  is  well  known  in  the  community  and  is  esteemed 
for  his  ability  and  integrity.  His  bank  is  not  subjected  to 
any  examination  by  state  or  national  authorities,  nor  is  he  re- 
quired to  make  reports  or  publish  statements  of  the  bank's 
condition.  Such  is  the  origin  of  many  of  the  private  banks.  As 
the  resources  of  the  community  grow  and  the  business  of  the 
private  bank  gradually  expands,  it  is  frequently  organized  into  a 
state  bank  or  merged  into  the  national  system. 

As  to  the  details  of  management  of  private  banks,  these  are, 
or  should  be,  in  compliance  with  the  rules  of  larger  institutions. 

Even  private  bankers  cannot  ignore  the  rules  of 
Management        safe  banking  without  sooner  or  later  suffering  the 

consequences.  In  rare  instances  the  practice  has 
been  adopted  by  private  bankers  of  making  public  reports  of 
their  condition,  and  these  reports  have  been  published  along 
with  those  of  state  and  national  banks,  as  a  means  of  inspiring 
public  confidence.  The  private  banker  can  offer  to  his  customer 
the  advantages  of  unlimited  liability  for  every  obligation -of  the 
bank,  and  a  greater  concentration  of  responsibility,  with  a 
stronger  sense  of  direct  personal  interest  in  the  welfare  of  the 
concern  than  is  felt  by  either  the  directors  or  officers  of  in- 
corporated institutions,  either  state  or  national.  The  best  guar- 
anty which  a  customer  can  have  of  the  soundness  of  his  bank  is 
the  integrity  and  ability  of  its  management,  and  the  private 
banker  can  offer  this  as  well  as  the  state  or  national  bank. 

SAYINGS  BANKS. 

During  the  latter  part  of  the  18th  century  there  seemed  to 
be  a  general  advance  in  the  spirit  of  fraternal  and  provident 
societies  in  Europe  and  especially  in  England,  and  out  of  this 


SAVINGS    BANKS.  247 

grew  the  mutual  savings  bank  as  a  means  of  taking  care  of  the 
poor  who  came  to  want  by  improvidence  or  misfortune.  The 
earliest  institution  of  this  kind  was  established  in  1765,  but  not 
until  about  the  close  of  the  century  did  these  institutions  become 
permanently  established.    In  1816  and  1817  the  need  of  savings 

banks  became  apparent  in  New  York  and  Boston. 
SaWngs°Banks      ^^^  couutry  was  then  becoming  well  settled  and 

the  people  were  able  to  accumulate  a  surplus  out 
of  their  earnings,  but  poverty  prevailed  throughout  the  country 
generally,  on  account  of  the  improvidence  of  the  people,  who 
squandered  their  earnings  and  paid  no  attention  "to  those  small 
but  frequent  savings  when  labor  is  plentiful  which  may  go  to 
meet  privation  in  unfavorable  seasons."  A  bill  was  introduced 
into  the  New  York  legislature  in  1819  and  passed,  for  the  in- 
corporation of  savings  banks,  and  continues,  with  some  modifi- 
cations, as  the  basis  of  the  savings  bank  system  of  the  state  at 
the  present  time. 

In  1900  there  were  in  the  United  States  1,007  savings  banks, 
with  deposits  aggregating  approximately  $2,600,000,000,  held 
in  the  name  of  6,000,000  depositors.  This  vast  sum  represents 
the  accumulated  savings  of  a  large  class  of  people,  especially 
those  who  are  inexperienced  in  handling  or  investing  money  and 
whose  savings  are  too  small  to  loan  or  invest  to  advantage.    The 

savings  bank  offers  to  the  weak  the  aid  of  the  ex- 
Character  pericnced  who  understand  finance,  to  receive  their 

small  gains  and  hold  them  securely  against  that 
time  when  need  or  desire  may  require  the  store  for  prudent  use. 
"It  accumulates  money;  it  inspires  and  trains  men  to  get  money 
and  to  the  wise  use  of  it;  it  adds  to  the  sum  of  national  resources 
in  money,  and  adds  to  the  means  for  advancement  in  material 
improvement."  Many  state  banks  combine  the  functions  of 
banks  of  discount  with  those  of  private  savings  banks,  and  while 
the  character  of  the  two  are  entirely  different  there  is  no  con- 
flict between  them.     The  savings  bank  aims  to  gather  wealth 


248  HISTORY    OF    BANKING. 

while  the  commercial  bank  uses  it,  and  turns  it  into  the  channels 
of  business.  The  profits  of  the  savings  bank,  of  the  mutual  kind, 
go  to  the  depositors,  while  the  profits  of  the  ordinary  commercial 
bank  go  to  the  stockholders  or  owners.  "The  savings  bank  opens 
its  doors  to  savers;  it  receives  and  permanently  invests  money. 
The  bank  opens  its  doors  to  borrowers  and  users  of  money,  for 
pay.  One  serves  by  receiving  and  keeping,  the  other  serves  by 
lending.  The  savings  institution  is  a  receiving  reservoir  from 
little  springs;  the  bank  is  a  distributing  reservoir  of  accumulated 
capital.^' 

Savings  banks  in  the  United  States  differ  from  those  in 
England  in  not  being  required  to  invest  their  funds  exclusively 
in  government  securities.  Thus  of  the  $2,600,000,000  on  de- 
posit in  our  savings  banks  in  1900,  30  per  cent,  was  loaned  out 
on  real  estate,  18  per  cent,  invested  in  state  and  other  stocks 
and  bonds,  11  per  cent,  in  railroad  bonds  and  stocks,  and  3 
per  cent,  in  government  bonds.  While  the  ordinary  discount 
bank  must  keep  its  funds  as  free  as  possible  from  permanent  in- 
vestments such  as  real  estate  loans,  the  savings  bank  pursues 

exactly  the  opposite  course,  its  favorite  form  of 
Investments         investment  being  real  estate  loans.     The  savings 

bank  does  not  hoard  its  money.  It  does  not  en- 
gage in  speculation,  but  makes  investments  in  solid  securities 
of  recognized  value. 

In  the  eastern  states  nearly  all  of  the  savings  banks  are  con- 
ducted upon  the  mutual  plan.  Their  capital  consists  of  the 
deposits,  and  the  depositors  are  the  owners  of  the  bank.  The 
business  of  the  bank  is  managed  by  a  board  of  trustees  who  re- 
ceive no   compensation  for  their  services.     The  only   salaries 

paid  are  to  those  officers  and  clerks  who  give  their 
Mutual  entire  time  to  the  business.     The  income  arises 

from  interest  on  loans,  and  after  taxes  and  running 
expenses  are  paid,  the  net  profits  go  to  the  depositors  as  inter- 
est or  dividends.    This  system  seems  to  most  nearly  accomplish 


PRIVATE    BANKS.  249 

the  object  for  which  such  institutions  were  formed,  as  it  gives 
the  depositor  the  full  benefit  of  whatever  profit  may  arise  from 
the  conduct  of  the  business. 

In  the  western  states  and  on  the  Pacific  coast  most  of  the 
savings  banks  are  private  institutions,  organized  and  conducted 
for  the  benefit  of  the  owners,  the  same  as  other  banks,  and 
paying  a  fixed  rate  of  interest  to  depositors.  Such  institutions 
have  a  fixed  capital  and  maintain  a  reserve  to  meet  withdrawals 

and  secure  the  confidence  of  the  public.  They 
Private  corrcspoud  to  statc  banks,  being  usually  subject 

to  certain  requirements  and  restrictions  of  the 
state  laws,  intended  for  the  better  security  of  depositors.  Of 
course  it  is  largely  a  question  of  management  whether  a  savings 
bank  is  secure  or  not,  either  by  the  mutual  or  private  system. 
All  the  law  can  do  is  to  hedge  about  the  interests  of  depositors 
and  place  restrictions  upon  ofiicers.  The  depositors  themselves 
must  judge  as  to  the  ability  and  integrity  displayed  in  the  man- 
agement of  the  institution. 

The  rules  for  the  conduct  of  the  business  differ  widely  in 
different  savings  banks.  Some  receive  deposits  as  low  as  a  dime, 
while  a  dollar  is  the  limit  in  others.  Some  allow  interest  only 
on  the  smallest  balance  of  the  half  year,  while  others  compute 
the  interest  upon  monthly  balances.  Money  withdrawn  before 
the  end  of  the  month  or  half  year  is  not  entitled  to  interest  for 

the  time  it  was  on  deposit.  Most  banks,  as  a  means 
Rules  of  protection  to  themselves,  may  require  thirty 

or  sixty  days'  written  notice  from  depositors  be- 
fore money  can  be  withdrawn.  This  regulation  is  only  enforced 
in  time  of  panic  to  enable  the  bank  to  realize  on  its  loans  or 
securities. 

TRUST    COMPANIES. 

During  the  past  twenty-five  years  there  has  developed  in  the 
United  States  a  class  of  financial  institutions  called  Trust  Com- 
panies, combining  the  functions  of  a  bank  with  those  of  a 


250  HISTORY    OF    BANKING. 

fiduciary  agent.     They  receive  deposits  and  make  loans,  but  of 
a  different  character  from  those  of  ordinary  banks.     It  is  the 
policy  of  conservative  banking  to  make  only  short 
Functfons  ^^^^  loaus,  and  upon  collaterals  or  upon  mercan- 

tile paper — such  as  is  given  for  goods  sold.  Every 
commercial  bank  aims  to  avoid  getting  its  funds  locked  up  in 
fixed  property  such  as  real  estate,  upon  which  it  would  be  diffi- 
cult to  realize  in  case  of  a  financial  stringency.  On  the  other 
hand,  trust  companies  aim  to  make  long  time  loans  on  real 
estate  or  other  sound  security.  Their  money  consists  largely  of 
trust  funds  belonging  to  estates,  for  which  they  act  as  adminis- 
trators, executors  or  assignees,  and  from  the  nature  of  these 
deposits  they  are  privileged  to  loan  them  out  on  long  terms. 
Trust  companies  act  as  conservators  of  those  who  are  not  com- 
petent to  manage  their  own  estates,  guardians  of  minor  children 
whose  estate  they  may  hold  until  the  heirs  reach  majority,  when 
it  is  divided;  assignee  and  receiver  in  cases  of  insolvent  firms 
or  corporations,  etc.  They  also  act  as  trustee  in  corporation 
mortgages,  and  registrar  and  transfer  agent  in  case  of  bond 
Functions  issues  by  railroads  and  other  large  corporations, 

of  Trust  They  do  a  general  financial  business  for  bankers 

ompanies  ^^^  othcrs,  collcct  rcuts  and  interest,  make  invest- 

ments, hold  titles,  pay  annuities  and  execute  wills  and  other 
trusts.  With  the  growth  of*  capital  and  complications  of  invest- 
ments, trust  companies  have  become  important  agents  in  our 
financial  and  commercial  system,  and  are  now  almost  a  necessity 
in  floating  bond  issues  and  promoting  large  enterprises.  They 
are  state  institutions,  being  organized  under  statutes  or  special 
charters  from  the  legislatures  of  the  states  in  which  they  are 
located. 

Suppose  some  large  enterprise  is  to  be  carried  through,  such 
as  the  building  of  a  railroad,  requiring  a  large  capital,  much 
in  excess  of  that  which  the  managers  or  promoters  of  the  enter- 
prise would  be  able  to  furnish  of  their  own.    Many  other  people 


TRUST     COMPANIES.  351 

are  able  and  willing  to  furnish  funds  for  the  enterprise,  but  at 
once  the  query  arises,  How  do  they  know  that  their  investment 
will  be  a  safe  one?  How  do  they  know  that  the  company  has 
been  properly  organized;  that  the  title  to  the  property  is  clear 
and  perfect,  and  that  there  has  been  no  over  issue  of  bonds? 
Each  prospective  investor  could  insist  upon  investigating  the 
affairs  of  the  company  and  having  all  of  these  and  many  other 

similar  queries  answered  to  his  satisfaction  before 
EnterpHse^"        parting  with  his  money,  thus  making  the  financing 

of  the  enterprise  almost  impossible.  Just  here 
the  trust  company  is  very  serviceable.  By  assuming  the  registra- 
tion and  issue  of  the  bonds,  the  character  of  the  securities,  so 
far  as  genuineness,  title,  etc.,  are  concerned,  is  established.  The 
trust  company  takes  title  to  the  property  under  the  mortgage, 
issues  the  bonds,  pays  the  interest,  and  in  fact  transacts  the  whole 
business,  turning  over  the  proceeds  from  the  sale  of  the  bonds 
as  the  money  is  paid  in.  Purchasers  of  bonds  rely  upon  the  trust 
company  to  see  that  there  has  not  been  an  over  issue  of  the 
bonds. 

Another  important  service  rendered  by  trust  companies  is  in 
issuing  stock  for  large  corporations,  and  in  case  of  sale,  making 
transfers  of  same.  When  the  stock  is  listed  on  the  stock  exchange 
this  is  an  assurance  to  buyers  that  the  stock  is  genuine,  and  there 
has  not  been  an  over  issue.  Then  again,  it  enables  purchasers 
to  have  the  stock  properly  transferred  without  the  necessity  of 
sending  the  certificates  to  the  headquarters  of  the  company, 
which  may  be  a  considerable  distance  away.  For  instance,  a 
corporation  in  Omaha  desiring  to  have  its  shares  listed  on  the 
Chicago  Stock  Exchange  may  make  an  arrangement  with  a 
trust  company  in  Chicago  to  attend  to  the  registration  and 
transfer  of  its  stock,  as  a  convenience  to  buyers,  and  it  is  not 
then  necessary  for  a  buyer  to  send  his  certificates  to  Omaha  to  be 
transferred.    That  can  be  done  by  the  trust  company  here. 


CHAPTER  XXYI. 

BANKING  IN  THE  UNITED  STATES. 

THE   UNITED   STATES   TREASURY. 

As  before  related.  President  Jackson  removed  the  government 
funds  from  the  United  States  Bank  in  1833,  and  placed  them  in 
various  state  banks,  located  in  various  parts  of  the  country, 
on  the  plea  that  the  bank  was  unsafe.  This  he  did,  not  by 
actually  removing  the  money,  but  by  a  process  which  resulted 
the  same — depositing  all  fresh  receipts  of  cash  in  the  state 
banks  and  drawing  all  government  warrants  for  payments  of 
money  against  the  balance  in  the  United  States  Bank  until  that 
balance  was  exhausted.  Prior  to  this  time  the  government 
had  kept  its  funds  in  its  own  banks,  or  those  which  it  virtually 
controlled,  with  the  exception  of  an  interval  of  five  years  (1811- 
1816)  between  the  expiration  of  the  charter  of  the  First  and 
the  formation  of  the  Second  United  States  Bank.  These  gov- 
ernment banks  had,  during  a  period  of  nearly  forty  years  (1789 
to  1811  and  1816  to  1833)  performed  two  highly  useful  and 
important  functions  in  connection  with  the  financial  system  of 
the  country — they  had  acted  as  the  fiscal  agent  of  the  govern- 
ment in  collecting  and  disbursing  the  public  revenues,  and  they 
had  maintained  a  uniform  standard  of  value  in 
the'^eposits  ^^^  money  of  the  country.  During  the  period 
(1811  to  1816)  when  there  was  no  government 
bank  as  a  "regulator  of  the  currency"  the  people  suffered  severely 
through  the  uncertainty  of  credit  and  the  effects  of  a  depreciated 
and  fluctuating  currency.  It  was  political  strife  that  brought 
about  the  removal  of  these  deposits,  and  not  economic  reasons. 
The  state  banks  at  that  time  were  generally  conducted  with  the 
utmost  disregard  for  not  only  safe  banking  methods,  but  very 

252 


UNITED    STATES    TREASURY.  353 

frequently  the  principles  of  honesty  as  well.  They  were  so  far 
removed  from  the  direct  control  of  the  government  that  the 
finances  of  the  country,  when  dependent  upon  them,  were  left  in 
a  state  of  uncertainty  and  demoralization.  To  make  matters 
worse  the  treasury  department  on  September  26,  1833,  followed 
up  the  transfer  of  its  deposits  by  issuing  a  circular  to  the  deposit 
banks  in  which  occurred  the  following  statement:  "The  deposits 
of  public  money  will  enable  you  to  afford  increased  facilities  to 
commerce,  and  to  extend  your  accommodations  to  individuals." 
Acting  upon  the  hint,  the  banks  loaned  out  the  government 
deposits,  the  era  of  speculation  set  in,  the  state  banks  inflated 
their  currency  with  greater  issues  of  bank  notes,  and  things  ran 
riot  until  the  culmination  was  reached  in  the  panic  of  1837. 
Nearly  all  the  banks  failed.  They  held  $32,000,000  of  govern- 
ment deposits,  a  large  portion  of  which  was  lost. 

It  then  became  apparent  that  the  government  must  keep  its 
money  in  its  own  vaults.  Two  attempts  had  been  made  at  the 
policy  of  entrusting  them  to  the  state  banks  (1811-1816  and 
1833-1837)  and  both  had  proven  disastrous.  Van  Buren  was 
the  president.  He  was  the  political  heir  of  General  Jackson, 
and  owed  his  election  largely  to  the  influence  of  the  latter.  Ac^ 
cordingly  he  shared  General  Jackson's  antagonism  to  a  United 
States  Bank,  and  was  averse  to  chartering  a  third  bank,  and 
yet  there  was  no  means  available  for  the  safe  keeping  of  the 
government  funds  or  the  establishment  of  a  stable  and  uniform 
currency  except  for  the  government  to  undertake  the  matter 
Establishment  itself.  After  scvcral  years  of  weary  dissensions  and 
liTTreasurT"^'  wraugliug  in  which  the  great  leaders,  Webster, 
System  Clav,  Calhouu  and  others,  participated,  in  speeches 

of  the  power  and  brilliancy  which  usually  characterized  these 
eminent  orators,  the  independent  treasury,  sometimes  called  the 
sub-treasury  system,  was  worked  out,  and  in  August,  1846, 
became  a  law.  Thus  was  begun  the  policy  of  the  independence 
of  the  government  from  the  banking  system  of  the  country.    The 


864  HISTORY    OF    BANKING. 

"divorce  of  bank  and  state"  advocated  by  Jackson  'and  urged 
by  Van  Buren  had  become  a  fact  under  Polk.  Whatever  objec- 
tion there  may  be  to  the  independent  treasury  system  at  the 
present  time,  its  establishment  in  1846  was  probably  the  best 
way  out  of  a  difficult  and  perplexing  situation. 

The  law  begins  by  defining  the  treasury  as  follows:  "The 
rooms  prepared  and  provided  in  the  new  treasury  building,  at  the 
seat  of  government,  for  the  use  of  the  Treasurer  of  the  United 
States  ami  his  assistants  and  clerks,  and  occupied  by  them,  and 
also  the  fire-proof  vaults  and  safes  erected  in  said  rooms  for  the 
keeping  of  the  public  moneys  in  the  possession  and  under  the  im- 
mediate control  of  said  treasurer,  and  such  other  apartments  as 
are  provided  for  in  this  act  as  places  of  deposit  of  the  public 
money,  are  hereby  constituted,  and  declared  to  be,  the  treasury 
of  the  United  States."  Branches  or  sub-treasuries  were  pro- 
vided for  in  the  law,  to  be  established  in  New  York,  Phila- 
delphia, Boston,  New  Orleans,  Charleston  and  St.  Louis,  each 
under  the  immediate  direction  of  an  assistant  treasurer.  The 
places  selected  for  the  location  of  sub-treasuries  were  cities  in 
which  the  government  was  presumed  to  have  extensive  trans- 
actions, either  as  ports  of  foreign  commerce,  or,  as  in  the  case 
of  St.  Louis,  a  convenient  point  for  the  sale  of  the  vast  domain 
of  government  lands.  These  were  the  cities  in  which  the 
government  deposits  had  been  kept,  principally,  in  the  state 
banks. 

The  Independent  Treasury  Act  further  provided  "That  the 
treasurer  of  the  United  States,  the  treasurer  of  the  mint  of  the 
United  States,  the  treasurers  and  those  acting  as 
of  the^Act^  such  of  the  various  branch  mints,  all  collectors  of 

the  customs,  all  surveyors  of  the  customs  acting 
also  as  collectors,  all  assistant  treasurers,  all  receivers  of  public 
moneys  at  the  several  land  offices,  all  postmasters,  and  all  public 
officers  of  whatsoever  character  be  and  they  are  hereby  required 
to  keep  safely,  without  loaning,  using,  depositing  in  banks,  or 


INDEPENDENT    TREASURY    ACT.  2«5 

exchanging  for  other  funds  than  as  allowed  by  this  act,  all  the 
public  money  collected  by  them,  or  otherwise  at  any  time  placed 
in  their  possession  or  custody."  Thus  the  purpose  of  the  act 
clearly  was  a  complete  separation  of  the  government  finances 
from  the  banking  system  of  the  country.  Even  though  the  sub- 
treasurers  and  collectors  in  various  parts  of  the  country  may 
not  at  first  have  been  provided  with  suitable  vaults  or  safes 
for  the  safe  keeping  of  the  public  money,  nevertheless  they  were 
expressly  prohibited  from  depositing  in  the  banks.  "liaken  in 
connection  with  the  law  authorizing  the  emission  of  treasury 
notes*  as  currency,  the  independent  treasury  and  its  branches 
became  in  effect  a  gigantic  bank. 

One  of  the  most  important  features  of  the  Independent  Treas- 
ury Act  was  the  special  clause  which  required  all  payments  of 
public  dues  and  also  all  disbursements  to  be  made  in  gold  or 
silver  coin  or  treasury  notes,  and  all  exchanges  of  funds  to  be 
made  upon  a  gold  and  silver  basis.  This  clause  placed  the 
country  on  a  specie  basis,  and  kept  up  a  specie  circulation  which 
gave  a  sound  basis  to  the  whole  country.  All  customs,  the  pro- 
ceeds of  the  sale  of  public  lands  and  other  public  dues  were  paid 

in  gold,  silver  or  treasury  notes,  and  all  disburse- 
Specie  Clause       mcuts  f or  Salaries  of  government  officials,  public 

improvements  and  expenses  of  the  Mexican  War 
were  paid  in  the  same.  The  Independent  Treasury  system  had  a 
beneficial  effect  by  restraining  the  issues  of  state  bank  currency. 
Considerable  difficulty  was  experienced  in  transferring  funds 
from  one  depository  or  sub-treasury  to  another  without  the  aid 
of  the  banks,  necessitating  the  movement  of  the  actual  money  in 
many  instances,  involving  both  expense  and  risk,  but  a  system 
of  drafts  was  adopted  that  worked  well. 


♦Treasury  notes  were  first  issued  during  tlie  years  1812-13-14-15  as  a 
means  of  carrying  on  the  war  against  England.  They  were  again  issued 
during  the  panic  period,  1837-1843,  and  again  during  the  Mexican  War, 
1846-1847.  They  were  usually  in  denominations  of  $100,  payable  to  order, 
and  bore  interest. 


266  .  HISTORY    OF    BANKING. 

The  Independent  Treasury  system  seemed  to  meet  every  re- 
quirement. The  Mexican  War  had  been  financed  successfully  by 
the  government  issuing  $20,000,000  of  interest-bearing  treasury 
notes  at  par  and  contracting  a  $28,000,000  loan,  its  bonds  com- 
manding a  premium.  Business  was  good.  Foreign  commerce 
had  increased  and  the  fiscal  machinery  of  the  new  system 
seemed  to  do  its  work  with  little  friction.  In  his  report  of 
December,  1856,  the  Secretary  of  the  Treasury  declared  "that  the 
independent  treasury,  when  over  trading  takes  place,  gradually 
fills  its  vaults,  withdraws  the  deposits,  and,  pressing  the  banks, 
the  merchants  and  the  dealers,  exercises  that  temperate  and 
timely  control  which  serves  to  secure  the  fortunes  of  individuals 
and  preserve  the  general  prosperity."  He  thus  believed  that  the 
Independent  Treasury  would  act  as  a  check  on  over  trading  and 
a  balance  wheel  to  our  commercial  prosperity — a  prediction 
which  has  not  been  altogether  verified  by  time  and  experience. 

The  great  crisis  in  our  history,  which  occurred  in  1861, 
changed  the  executive  officers  of  the  government  and  placed  at 
the  helm  a  class  of  men  who  were  the  political  descendants  of 
the  old  Whig  party,  of  which  Webster  and  Clay  were  leaders. 
Lincoln  and  Chase  were  not  so  particular  to  maintain  the  com- 
plete separation  of.  the  Treasury  from  the  banking  system,  and  as 
the  exigencies  of  a  great  war  confronted  them,  they  turned  at 
once  to  the  banks  for  loans.  Between  the  panic  of  1857  and  the 
outbreak  of  the  war  the  country  had  been  prosper- 
The  War  Crisis  ous,  and  the  bauks  had  accumulated  a  strong 
specie  reserve,  while  the  expenditures  of  the  gov- 
ernment during  this  time  had  exceeded  the  revenues  and  left 
the  treasury  empty,  the  deficit  having  been  met  by  bond  issues 
amounting  to  $90,000,000.  The  government  needed  gold  and 
the  banks  had  large  quantities  of  it.  Accordingly  Secretary  Chase 
in  July,  1861,  applied  to  the  banks  for  a  loan  of  $50,000,000. 
This  was  the  first  friendly  act  or  overture  made  to  the  banks 
since  the  "divorce  of  bank  and  state"  in  1846.    It  was  the  first 


TREASURY  AND  THE  BANKS.  257 

step  away  from  the  principle  on  which  the  Independent  Treas- 
ury was  founded — the  complete  separation  of  the  Treasury  from 
the  banking  system  of  the  country.  Between  August  19  and 
November  19,  1861,  Secretary  Chase  borrowed  over  $140,000,000 
from  the  banks. 

Loaning  their  gold  reserve  to  the  government,  the  banks 
were  unable  to  redeem  their  notes,  and  in  December,  1861,  were 
forced  to  suspend  specie  payment.  Being  sorely  pressed  for 
funds  with  which  to  carry  on  the  war,  the  government  had  issued 
large  volumes  of  "greenbacks,"  which  by  a  legal  provision  were 
forced  upon  creditors.  Not  having  a  reserve  sufficient  to  support 
Suspension  ^^^   paper  circulation,   on   January   6,   1862,  the 

of  Specie  government  also  suspended  specie  payments.  Thus 

ayments  ^^^  "specie  clausc,"  ouc  of  the  most  pronounced 

features  of  the  Independent  Treasury  Act,  was  made  of  no  effect. 

Next  came  the  National  Banking  Act,  by  which  the  banking 
system  of  the  country  was  linked  to  the  Treasury  Department, 
to  be  controlled  by  it.  Banks  were  made  depositories  of  public 
funds  and  authorized  to  act  as  financial  agents  of  the  government 
in  receiving  subscriptions  to  government  loans  and  the  collection 
of  internal  revenue  taxes.  So  close  was  now  the  relation  be- 
tween the  banks  and  the  treasury  that  the  law  of  1846  had  be- 
come practically  a  dead  letter,  and  the  very  purposes  for  which 
Closer  Relation  the  independent  treasury  system  was  established — 
Treasury  and  Separation  from  the  banks  and  the  maintenance 
the  Banks  of  specic  payments — were  both  abandoned  owing  to 

the  stress  of  circumstances.  By  the  same  act  which  formed  the 
national  banks  the  state  bank  currency  was  driven  out  of  circula- 
tion and  the  issues  of  the  national  bank  notes  were  regulated 
and  controlled  by  the  treasury.  These  banks  aided  the  Treasury 
in  placing  and  carrying  the  immense  loans  necessary  to  maintain 
the  armies  and  fleets  in  active  service  for  four  years.  It  would 
indeed  have  been  very  difficult  if  not  impossible  for  the  govern- 
ment to  carry  the  war  through  to  its  close  without  the  aid  and 
co-operation  of  the  banks. 


258  HISTORY    OF    BANKING. 

The  close  connection  between  the  Treasury  and  the  banks, 
brought  about  by  the  exigencies  of  a  great  war,  have  continued 
to  the  present  time,  and  even  grown  stronger  and  more  intimate 
as  the  financial  operations  of  the  government  have  expanded  in 
recent  years.  In  1879  the  sub-treasury  at  New  York  became  a 
member  of  the  bank  clearing  house.     This  connection  with  the 

banks  proved  to  be  very  important  and  valuable 
Since  the^war      ^^  ^^^  government  just  prior  to  and  during  the 

period  of  the  resumption  of  specie  payment,  in 
1879,  for  it  relieved  the  sub-treasury  of  the  necessity  of  making 
coin  payments  to  any  large  extent,  since  the  clearing  house 
agreed  to  accept  legal  tender  notes  in  payment  of  all  balances 
due  from  the  government  to  the  associated  banks.  Indeed,  if 
the  Treasury  had  attempted  the  resumption  of  specie  payments 
at  that  time  without  the  aid  and  co-operation  of  the  banks,  it  is 
almost  certain  that  the  attempt  would  have  proven  a  failure 
because  the  banks  held  the  chief  supply  of  gold.  Since  the 
resumption  of  specie  payments  the  policy  of  the  government 
with  reference  to  the  Treasury  has  remained  practically  un- 
changed to  the  present  time.  Upon  the  Treasury  depends  the 
stability  of  our  entire  financial  system,  and  upon  this  largely 
depends  the  prosperity  of  the  nation. 

Having  now  sketched  briefly  the  history  of  the  Independent 
Treasury  system,  we  shall  proceed  to  examine  into  its  character 
and  organization.  The  Treasury  is  the  agency  whereby  the 
financial  operations  of  the  government  are  carried  on.  It  is  the 
means  by  which  a  uniform  standard  of  value  is  given  to  our 
currency,  a  system  of  coinage  is  maintained,  our  banking  system 

is  controlled,  and  the  revenues  of  the  government 
S?Trirsu^°^     are  collected  and   disbursed.     The   Independent 

Treasury  consists  of  the  Treasury  Department  at 
Washington  and  nine  sub-treasuries,  located  in  Baltimore,  Bos- 
ton, Chicago,  Cincinnati,  New  Orleans,  New  York,  Philadelphia, 
San  Francisco  and  St.  Louis.    In  addition  to  these  the  govern- 


TREASURY    RESERVE.  259 

ment  has  established  at  various  places,  where  there  are  no  sub- 
treasuries,  depositories  for  the  receipt  and  payment  of  govern- 
ment funds. 

The  United  States  Treasury  holds  a  reserve  of  $150,000,000 
gold  for  the  purpose  of  maintaining  the  credit  of  the  govern- 
ment and  establishing  confidence  in  its  ability  to  redeem  its 
paper  currency  in  specie  on  demand.  This  reserve  supports 
obligations  equal  to  nearly  ten  times  its  amount,  so  great  is  the 
faith  of  the  people  in  the  ability  and  integrity  of  the  government. 
The  outstanding  obligations  of  the  government,  which  rest  in 
whole  or  in  part  upon  this  reserve,  and  are  kept  on  a  par  with 
gold  by  it,  amounted  on  December  31,  1902,  to  $1,375,347,166, 
as  follows: 

United  States  notes  (greenbacks) $343,783,541 

National  bank  notes 371,552,495 

Silver  coin  (standard  silver  dollars) 78,700,912 

Silver  coin  (subsidiary)  93,082,863 

Silver  certificates   463,304,840 

Treasury  notes  of  1900 24,922,515 

Not  only  are  all  forms  of  money  in  the  United  States  main- 
tained upon  a  uniform  gold  basis  and  made  interchangeable  by 
the  redemption  system  of  the  government,  thus  causing  $1,375,- 
347,166  in  credit  money  to  circulate  as  the  equivalent  of  gold, but 
the  Treasury  is  constantly  redeeming  the  currency  presented  to  it, 
and  issuing  new  bills  instead,  thus  freeing  the  paper  circulation 
from  old  and  tattered  bills.  The  government  also  receives  de- 
posits of  gold  coin  or  bullion  and  issues  certificates  against  these 
in  equal  amount.  Of  these  there  were  outstanding  on  July  1, 
1901,  $247,036,359,  representing  that  amount  of  gold  in  the 
vaults  of  the  Treasury. 

The  business  of  the  nine  sub-treasuries  consists  in  receiving 
deposits  from  collectors  of  customs  in  the  ports  of  entry,  in- 
ternal revenue  officers,  national  banks  for  their  annual  tax,  post- 
masters for  account  of  the  post  office  department,  also  patent 


260  HISTORY    OF    BANKING. 

fees,  deposits  for  transfer  to  other  points  by  banks  or  other  cor- 
porations and  individuals.  The  payments  consist  of  pensions  to 
soldiers  and  their  widows,  and  the  warrants  or  checks  of  dis- 
bursing officers  such  as  paymasters,  quartermasters  and  others. 
All  mutilated  currency  such  as  United  States  notes 
sub-Trelsuries  ^^  bank  bills  that  have  become  unfit  for  circula- 
tion, are  replaced  at  the  sub-treasury  free  of 
charge.  United  States  notes  are  redeemed  in  gold,  and  one 
kind  of  money  is  exchanged  for  another.  Gold  certificates  are 
issued  for  deposits  of  not  less  than  twenty  dollars  of  gold  coin. 
Silver  certificates  are  issued  for  silver  dollars,  and  vice  versa. 
Thus  the  sub-treasury  is  a  money-receiving,  money-paying  and 
money-exchanging  establishment.  Its  accounts  are  balanced  at 
the  close  of  each  day  and  a  summarized  statement  of  the  day's 
business  is  forwarded  to  Washington. 

Some  of  our  ablest  financiers  and  students  of  the  subject  are 
now  criticising  and  condemning  the  Independent  Treasury  sys- 
tem, on  the  ground  that  it  interferes  with  the  normal  operation  of 
the  business  interests  of  the  country.  The  principal  objection 
lies  in  the  fact  that  it  locks  up  in  the  sub-treasuries  large 
volumes  of  money  in  the  form  of  customs  at  certain  times  or 
seasons,  thus  contracting  the  money  in  circulation,  when  the 
business  interests  of  the  country  may  require  all  the  circulating 
medium.  Prof.  David  Kinley,  in  criticising  the  system,  says: 
"The  action  of  the  Independent  Treasury  is  such  as  to  vary  the 
amount  of  money  in  circulation.  At  one  time  it  absorbs,  at 
another  disburses,  considerable  sums.  There  is  nothing  in  the 
nature  of  the  sub-treasury  that  makes  its  receipts  and  payments 
necessarily  concomitant  with  a  free  and  stringent  condition  of 
the  money  market  respectively."  Its  action  is  independent  of 
the  money  market.  Were  it  possible  that  the  Independent  Treas- 
ury could  absorb  and  withhold  funds  when  not  needed  in  busi- 
ness channels,  and  disburse  it  freely  when  business  interests 
required  a  larger  circulating  medium,  it  would  afford  elasticity 


THE    SUB-TREASURIES.  261 

to  the  currency  and  prove  a  great  benefit,  but  unfortunately  it  is 
liable  to  act  in  exactly  the  opposite  direction,  and  thus  aggravate 
the  money  stringency.  Then  the  Secretary  of  the  Treasury  must 
needs  go  outside  of  the  law  and  use  his  prerogatives  to  assist 
the  financial  interests  of  the  country  by  the  purchase  of  bonds 
so  as  to  release  some  portion  of  the  money  in  the  Treasury  for 
general  circulation  and  use. 

By  withholding  money  from  circulation  as  the  Treasury 
does  at  times,  the  effect  is  to  lower  prices  of  commodities  gen- 
erally, and  at  other  times  large  disbursements  by  the  Treasury 
tend  to  raise  prices  by  making  money  more  plentiful,  thus  in  both 
instances  unsettling  values,  to  a  slight  extent.  The  remedy 
advocated  is  to  abolish  the  sub-treasuries  and  deposit  the  govern- 
ment funds  with  the  national  banks,  where  it  can  be  used  in  the 
channels  of  trade  and  commerce. 


BANK  CLEARING  HOUSE. 


CHAPTER  XXVII. 

SETTLEMENTS  BETWEEN  BANKS. 
HISTORY;    OBJECT;    METHODS;    CLEARING    HOUSE    CERTIFICATES. 

The  original  idea  of  a  clearing  house  was  an  institution  de- 
signed to  facilitate  the  settlement  of  daily  balances  due  to  and 
from  a  number  of  banks.  It  is  thus  a  labor  saving  device, 
arising  from  the  payment  of  checks  on  each  other,  and  the 
transaction  of  other  business.  It  would  be  almost,  if  not  quite, 
impossible  to  transact  the  volume  of  business 
Object  which  daily  passes  through  our  banks  were  it  not 

for  this  ingenious  institution.  In  the  New  York 
clearing  nouse  alone  the  daily  clearings  frequently  run  above 
$300,000,000,  and  this  vast  volume  of  business  is  settled  by  the 
payment  of  about  five  per  cent,  of  actual  money  as  balances. 
The  scheme  of  the  clearing  house  is  merely  to  offset  one  debit 
against  another  credit.  Were  there  but  one  bank  in  New  York, 
no  clearing  house  would  be  necessary,  since  the  debits  and 
credits  would  be  offset  against  each  other  on  the  books  of  the 
bank  and  one  indebtedness  would  cancel  another,  to  a  large 
extent,  but  where  there  are  numerous  banks  and  vast  numbers 
of  checks  to  be  settled,  the  clearing  house  effects  an  enormous 
saving  by  bringing  them  together.  The  clearing  house  with  its 
gigantic  operations  cancels  obligations  arising  between  banks, 
the  same  as  the  banks  do  for  the  individuals  composing  a  busi- 
ness community. 

The  use  of  checks  and  drafts  in  the  transaction  of  business 
has  grown  in  this  country  to  a  very  wide  limit,  much  in  excess 

362 


USE  -OF    SUBSTITUTES    FOR    MONEY.  263 

of  their  use  in  any  other  country,  and  as  the  United  States 
becomes  older  and  better  banking  facilities  are  provided,  people 

are  gradually  educated  to  the  use  of  commercial 
andDrafir^*       paper,   and   the   volume    of   actual   money — coin 

or  paper  currency — as  compared  to  the  volume  of 
business  transacted,  grows  proportionately  less.  The  increase 
in  the  use  of  checks  and  drafts  has  more  than  kept  pace  with 
the  increase  in  the  volume  of  business  of  the  country,  hence  the 
volume  of  actual  cash  in  circulation  has  grown  proportionately 
smaller.  Again  the  proportion  of  checks  and  drafts  to  money 
is  less  in  the  parts  of  the  country  distant  from  the  money  centers 
and  in  small  towns  where  banks  are  scarce.  Such  communities 
need  more  money  in  proportion  to  the  volume  of  business  done, 
and  must  have  the  ready  cash  in  hand  to  cover  the  numerous 
small  transactions  occurring.  But  in  the  large  cities  and  great 
money  centers  of  the  country  substitutes  for  money  in  the  form 
of  commercial  paper  are  more  extensively  used,  and  the  transfer 
of  credits  upon  the  books  of  the  banks  constitutes  the  method 
of  payment  in  a  large  proportion  of  instances.  The  clearing 
house  encourages  and  facilitates  the  use  of  Substitutes  for  money 
by  furnishing  a  safer  and  more  convenient  method  for  settling 
exchanges  between  banks. 

The  first  clearing  house  was  organized  in  London  about  1775, 
and  for  three-quarters  of  a  century  it  and  the  one  established 
in  Edinburgh  soon  after  remained  the  only  organizations  of  the 
kind.  Prior  to  the  establishment  of  the  London  clearing  house 
the  Bank  of  England  served  as  a  means  of  making  settlements, 
and  besides  the  people  were  not  accustomed  to  the  nse  of  bank 
checks  in  making  payments,  as  at^he  present  time.    The  New 

York  clearing  house  was  established  in  1853,  Bos- 
History  ton  in  1856,  Philadelphia  in  1858,  and  Chicago  in 

1865.  The  clearing  house  is  therefore  a  com- 
paratively recent  institution.  Every  considerable  city  where 
banks  are  numerous  now  has  its  clearing  house,  and  the  total 


264  BANK    CLEARING    HOUSE: 

annual  clearings  of  the  United  States  mount  up  to  fabulous 
figures. 

A  room  of  suitable  size  to  accommodate  the  volume  of  busi- 
ness, quiet  and  centrally  located,  is  the  first  consideration.  The 
furniture  consists  usually  of  a  counter  or  desks  over  which  the 
settlements  are  to  be  made.  Each  bank,  member 
Clearing"  °^  ^^®  associatiou,  scuds  to  the  clearing  room  at 

the  precise  hour  appointed  two  clerks,  one  of  whom 
holds  the  exchanges  of  the  previous  day,  including  also  items 
received  in  the  morning's  mail.  These  are  all  listed  and  those 
against  each  bank  kept  separate.  At  the  tap  of  the  manager's 
bell  a  clerk  from  each  bank  takes  his  position  behind  the  coun- 
ter and  opposite  him  his  companion  from  the  same  bank.  A 
given  signal  and  all  of  the  clerks  outside  the  counter  move  for- 
ward to  a  point  opposite  the  next  clerk,  pass  the  exchanges  be- 
longing to  the  bank  represented  by  that  clerk  over  the  counter, 
take  a  receipt  for  them,  and  then  with  a  concerted  movement 
all  pass  to  the  next.  When  the  clerks  on  the  outer  side  of  the 
counter  have  made  their  rounds  and  delivered  their  exchanges 
they  return  to  their  several  banks,  carrying  with  them  the  checks 
received  from  other  banks,  while  the  settling  clerks  remain  to 
cast  up  the  columns  and  ascertain  whether  their  several  banks 
are  debtor  or  creditor,  whether  they  are  to  receive  or  must  pay 
a  balance  into  the  clearing  house.  As  each  clerk  completes  his 
calculations  he  reports  the  result  to  the  manager,  and  when  all 
have  finished,  and  the  totals  agree,  the  clerks  are  dismissed. 

The  total  of  the  debits  against  the  debtor  banks  must  equal 
the  total  of  the  credits  in  favor  of  the  creditor  banks,  on  the 
theory  that  every  debit  has  a  corresponding  credit.  A  bank 
cannot  know  until  its  settling  clerk  returns  whether  it  has  a 
balance  in  its  favor  or  is  owing  the  clearing  house  and  how  much. 
It  may  be  a  creditor  one  day  and  a  debtor  the  next.  Its  officials 
naturally  hope  for  a  favorable  balance,  for  that  indicates  a 
temporary  increase  in  its  line  of  deposits.    But  if  the  balance  is 


CLEARING    HOUSE    BALANCES.  265 

against  the  bank  it  must  be  prepared  to  meet  it  promptly  at  the 
appointed  hour.  The  payment  of  balances  by  the  debtor  banks 
takes  place  at  perhaps  an  hour  after  the  exchanges 
BrianMs°*°*^  have  been  made,  a  receipt  being  taken  in  every 
case  in  the  regular  way.  Messengers  from  the 
creditor  banks  call  later  to  receive  the  balances  due  their  banks. 
The  kind  of  money  used  in  the  payment  of  these  balances  is 
regulated  by  the  rules  of  the  associations,  but  is  usually  gold 
coin  and  currency.  Silver  is  permitted  in  restricted  quantities 
in  some  associations,  but  owing  to  its  bulk  it  is  not  well  suited 
to  large  payments.  The  rules  of  some  associations  require 
the  money  paid  in  to  be  assorted  and  put  up  in  packages  of 
$5,000,  on  which  is  marked  the  number  of  the  bank,  as  a  guar- 
antee of  the  correctness  of  the  count. 

The  management  of  a  clearing  house  association  is  usually 
vested  in  a  board  of  officers  consisting  of  a  president,  vice  presi- 
dent, secretary,  treasurer,  manager  and  a  clearing  house  commit- 
tee. In  small  cities  this  list  of  officers  is  sometimes  curtailed 
by  omitting  the  office  of  vice  president  and  secretary  and  com- 
bining the  duties  of  the  latter  with  those  of  manager.  The 
duties  of  the  officers  are  such  as  usually  appertain 
Management  to  similar  officcs  in  Corporations,  with  the  excep- 
tion of  the  manager,  who  has  charge  of  the  clear- 
ings and  is  the  principal  executive  officer  of  the  association. 
The  clearing  house  committee  is  usually  composed  of  three  of 
the  most  capable  bankers  in  the  association,  elected  annually  by 
the  members.  This  committee  has  almost  absolute  authority, 
being  in  effect  a  board  of  directors.  It  decides  upon  the  admis- 
sion of  new  members,  suspension  of  members  when  expedient, 
makes  rules  for  the  management  of  the  association,  and  in  gen- 
eral directs  its  business. 

While  the  first  and  primary  object  of  a  clearing  house  is 
the  settlement  of  exchanges  between  banks,  its  functions  are  not 
confined  to  this.    By  association  many  benefits  have  been  derived 


266  BANK   CLEARING   HOUSE. 

by  the  banks  not  contemplated  in  the  original  intent,  and  the 
tendency  has  been,  in  recent  years,  to  include  in  the  scope  of  the 
clearing  houses  many  questions  of  policy  and  prac- 
Functions  tice  affecting  the  banks  and  the  business  com- 

munity. The  most  important  functions  of 
the  clearing  house,  beyond  that  of  effecting  exchanges,  is  summed 
up  by  Cannon  in  his  "Clearinghouses,"  as  follows:  "1.  The 
extending  of  loans  to  the  government.  2.  Mutual  assistance  of 
members.  3.  Fixing  uniform  rates  on  deposits.  4.  Fixing  uni- 
form rates  of  exchange  and  of  charges  on  collections.  5.  The 
issue  of  clearing  house  loan  certificates."  In  case  a  member  is 
found  to  be  in  financial  straits  owing  to  a  panic  or  false  rumor, 
causing  a  run  of  depositors,  and  is  unable  to  convert  its  assets 
into  cash  with  sufficient  rapidity  to  meet  its  demands,  the  clear- 
ing house  committee  will  examine  into  its  condition,  and  if  its 
assets  are  found  to  be  ample  and  good,  and  its  management  not 
seriously  defective,  it  will  extend  temporary  aid  until  the  strain 
is  relaxed.  If  the  member,  however,  is  addicted  to  objectionable 
methods  in  management  the  committee  will  not  go  far  out  of  its 
way  to  lend  saving  help,  preferring  to  get  rid  in  this  way  of  a 
weak  and  ill  managed  member. 

By  fixing  the  rates  of  interest  on  deposits,  rates  for  collection 
and  exchange,  etc.,  the  committee  takes  away  the  incentive  of 
banks  to   compete  against  each  other  in  these  particulars — a 
practice  which  might  lead  to  improper  and  unsafe  banking. 
Eate  cutting  is  especially  objectionable  in  the  banking  business. 
But  probably  the  most  important  function  exercised  by  the 
clearing  house  is  the  issuance  of  loan  certificates.     These  are 
given  for  temporary  loans,  usually  consisting  of  good  assets,  made 
by  members  to  the  association  and  are  receivable 
certmcat^s°"'''     for  balances  due  to  other  members.    The  first  cer- 
tificates were  issued  by  the  New  York  clearing 
house  at  the  opening  of  the  Civil  War,  and  were  necessitated 
by  the  general  decline  and  shrinkage  in  bank  deposits  and  loans 


CLEARING    HOUSE    CERTIFICATES.  267 

consequent  upon  the  uncertainty  attending  the  election  of 
Lincoln  to  the  presidency.  The  New  York  clearing  house  met 
and  passed  the  following  resolution: 

"In  order  to  enable  the  banks  of  the  city  of  New  York  to 
expand  their  loans  and  discounts,  and  also  for  the  purpose  of 
facilitating  the  settlement  of  exchanges  between  banks,  it  is 
proposed  that  any  bank  in  the  Clearing  House  Association  may, 
at  its  option,  deposit  with  a  committee  of  five  persons — to  be 
appointed  for  that  purpose — an  amount  of  its  bills  receivable. 
United  States  stocks,  treasury  notes  or  stocks  of  the  State  of 
New  York,  to  be  approved  by  said  committee,  who  shall  be 
authorized  to  issue  thereon  to  the  said  depositing  bank  certifi- 
cates of  deposit  bearing  interest  at  seven  per  cent,  per  annum, 
in  denominations  of  $5,000  and  $10,000  each  as  may  be  desired, 
to  an  amount  equal  to  seventy-five  per  cent,  of  such  deposits. 
These  certificates  may  be  used  in  the  settlement  of  balances  at 
the  clearing  house  for  a  period  of  thirty  days  from  the  date 
thereof,  and  they  shall  be  received  by  creditor  banks  during  that 
period,  daily,  in  the  same  proportion  as  they  bear  to  the  aggre- 
gate amount  of  the  debtor  balances  paid  at  the  clearing  house. 
The  interest  which  may  accrue  upon  these  certificates  shall,  at 
the  expiration  of  thirty  days,  be  apportioned  among  the  banks 
which  shall  have  held  them  during  the  time." 

Several  times  during  the  Civil  War  the  New  York  clearing 
house  resorted  to  the  use  of  certificates  as  a  means  of  relieving 
the  financial  stringency,  and  the  effect  in  each  case  was  decidedly 
beneficial.  Banks  were  thus  enabled  to  discount  commercial 
paper  and  make  loans  to  relieve  business  firms  which  were  per- 
fectly safe  and  solvent,  but  in  distress,  and  the  business  situation 
at  once  felt  the  brightening  effects  of  the  policy.  Clearing  house 
certificates  to  the  extent  of  $22,000,000  were  in  circulation  among 
the  banks  of  New  York  in  1862,  and  this  was  equivalent  to  a  vast 
increase  in  the  volume  of  money  in  circulation.  Again  during 
the  panic  of  1873  the  same  course  was  pursued  and  about  $26,- 


2G8  BANK    CLEARING    HOUSE. 

000,000  in  certificates  were  issued  by  the  New  York  clearing 
house.  Other  cities  seeing  the  benefits  of  the  system,  adopted 
it,  and  issued  certificates  for  temporary  relief,  thus  greatly  reliev- 
ing the  severity  of  the  memorable  panic  of  1873,  which  extended 
over  the  entire  country  and  resulted  in  severe  hardships. 

In  1893  a  panic  of  unusual  severity  spread  over  the  United 
States.  Banks  were  forced  to  close  and  business  houses  were 
pushed  to  the  wall.  Under  the  restrictions  of  the  national  bank- 
ing law  it  was  impossible  to  secure  relief  by  an  increase  in  national 
bank  notes  in  time  to  save  the  people  from  the  dis- 
Panic  of  1893  astcrs  which  follow  in  the  wake  of  a  financial  storm. 
Banks  in  the  small  cities  and  towns  drew  heavily 
against  their  deposits  in  the  large  cities  and  money  centers, 
especially  New  York,  and  it  became  necessary  for  the  financial 
institutions,  chiefiy  in  New  York,  to  find  a  means  of  staying 
the  force  of  the  panic.  The  most  potent  factor  in  this  relief 
was  the  clearing  house  certificates  issued  by  the  associations  of 
New  York  and  other  cities.  Forty-one  million  dollars  of  these 
certificates  were  issued  by  the  clearing  house  committee,  based 
upon  the  deposits  of  securities  by  various  banks  of  New  York. 
Other  cities  pursued  the  same  plan,  and  the  amount  of  bank 
money  was  thereby  suddenly  increased  throughout  the  country 
to  the  extent  of  perhaps  $150,000,000,  greatly  to  the  relief  of 
business  interests  generally. 

What  is  and  what  is  not  proper  matter  for  clearing  depends 
upon  the  rules  of  each  particular  association,  and  these  are  by 
no  means  uniform  on  this  point.  The  following  paragraph  ap- 
pears in  the  rules  of  a  western  clearing  house:  "Proper  matter 
for  clearing  shall  consist  of  checks,  drafts,  manager's  certifi- 
cates, certificates  of  deposit,  either  demand  or  ma- 
ciearing°'*  tured,  and  any  other  matter  specially  agreed  upon, 

until  notice  is  given  to  the  contrary,  and  any  bank 
clearing  paper  not  proper  shall  be  fined."  In  some  associations 
notes   and   drafts   are  not   sent   through  the   clearings,   while 


MATTER  FOR  CLEARING.  269 

in  others  they  may  be  cleared.  The  general  rule  seems  to  be 
that  only  such  items  as  upon  their  face  are  unconditional  de- 
mands upon  a  bank,  for  payment,  are  proper  material  for  clear- 
ing. Some  associations  keep  near  this  rule,  while  others  seem  to 
broaden  it  to  the  full  limit  of  expediency. 

The  clearing  house  associations  in  a  number  of  the  large 
cities  have  enacted  rules  forbidding  matter  to  be  cleared  which 
bears  a  restrictive  endorsement.  It  was  formerly  the  custom 
for  depositors  to  endorse  "For  Deposit,"  "For  Account  of,"  "For 
Collection,"  etc.,  above  the  name  of  the  depositor, 
End^oislments  ^^^^  intending  to  transfer  possession  but  not  title 
to  the  paper.  This  is  now  forbidden,  as  a  measure 
of  self-protection,  by  many  large  associations,  unless  the  clear- 
ing bank  specially  guarantees  the  paper.  Paper  then  to  pass 
through  the  clearing  house  should  be  endorsed  either  in  blank 
or  full,  as  "Pay or  order."  Before  sending  its  ex- 
changes to  the  clearing  house,  each  bank  stamps  a  receipt  upon 
the  back  of  each  item,  with  its  number,  and  the  words,  "Re- 
ceived payment  through  the clearing  house."  or 

otherwise,  as  the  rules  of  the  association  prescribe.  This  in- 
dorsement though  made  unofficially  and  by  means  of  a  rubber 
stamp,  is  regarded  as  authentic,  and  guarantees  all  previous 
indorsements  After  the  clearings  are  made,  items  which  are  not 
honored  by  the  bank  on  which  they  are  drawn  are  returned  by 
messenger  and  "bought  back"  by  the  bank  through  which  they 
were  cleared. 

Banks  and  trust  companies  not  members  of  the  clearing  house 
association  may  clear  through  a  member-bank,  but  the  latter  is 
liable  to  the  association  for  such  exchanges  the  same  as  for  its 
own,  and  they  usually  exact  proper  security  as  well  as  compensa- 
tion from  the  bank  or  trust  company  for  performing  the  service. 
In  Boston  the  clearing  house  association  has  put  in  operation  a 
system  for  collecting  checks  on  out-of-town  banks  which  is 
certainly  a  material  saving  in  expense  as  well  as  labor.    Instead 


270  BANK    CLEARING    HOUSE. 

of  each  bank  collecting  its  out-of-town  checks,  these  are  all  sent 
to  the  clearing  house  at  a  fixed  hour  daily  and  there  assorted-  by- 
towns  and  banks.  All  of  the  checks  on  each  country  bank  are 
Non-members  ^^^^  listed  and  forwarded  to  that  bank  in  one 
and  Country  package.  This  is  a  decided  advantage  also  to  the 
^^^^  country  bank,  since  payment  can  be  made  to  the 

Boston  clearing  house  for  all  of  these  checks  at  one  time,  in- 
stead of  having  to  remit  to  several  different  banks.  The  remit- 
tances are  then  put  through  the  regular  clearings  by  the 
manager  of  the  clearing  house,  very  much  the  same  as  other 
items. 

No  doubt  the  clearing  house,  which  was  originally  intended 
merely  as  a  labor  and  time  saving  device,  and  which  has  since 
developed  into  an  important  factor  in  our  financial  system, 
assuming  new  functions  from  time  to  time,  will  further  expand 
and  add  to  the  efficiency  of  the  financial  machinery  of  our 
country.  In  his  valuable  treatise  on  clearing  houses,  Mr.  James 
G.  Cannon,  president  of  the  Fourth  National  Bank  of  New 
York,  says:  "Clearing  houses  are  gradually  becoming  a  welding 
force  that  ultimately  will  bring  to  the  banking  business  of  this 
country  the  centralization  which  it  so  greatly  needs.  In  the 
Clearing-  course  of  time  rates  for  money  in  the  United  States 

houses  of  the  will  bccomc  morc  and  more  on  a  par  with  those 
prevailing  in  European  money  centers,  and  then 
the  clearing  houses  of  the  various  financial  centers  of  this  country 
will  be  obliged  to  undertake  functions  which  as  yet  they  have 
only  discussed.'^ 


BORROWING  AND  LENDING  MONEY. 


CHAPTER  XXVIII. 

THE    USE    OP    CREDIT. 

THE  MONEY  MARKET;   CALL  LOANS;   COLLATERALS; 
NOTE    BROKERS. 

Business  men  must  borrow  money.  With  rare  exceptions 
every  firm  and  corporation  in  the  regular  course  of  business 
must  at  times  resort  to  the  money  lender.  Credit  lies  at  the 
foundation  of  our  financial  and  commercial  systems,  and  it  is 
prudent  business  policy  to  use  credit  within  proper  limits.  When 
a  firm  can  earn  more  than  the  ruling  rate  of  interest  upon  capital 
employed,  after  safely  making  allowance  for  all  expenses  and 
hazards,  it  may  prudently  use  borrowed  money  as  a  part  of  its 
working  capital.  Suppose  a  firm  with  $100,000  capital  turns  its 
capital  over  six  times  a  year  and  makes  a  net  profit  of  2J  per 
cent,  each  time.  Its  yearly  profits  then  would  be  $15,000.  If 
now  it  can  extend  its  business  in  the  same  proportion  it  can 
afford  to  borrow,  say  $50,000  at  6  per  cent,  interest  to  increase 
its  working  capital.  Its  profits  would  then  amount  to  $22,500, 
from  which  deduct  $3,000  interest,  and  we  have  a  net  profit  of 
$19,500,  or  nearly  20  per  cent,  upon  the  capital  of  the  firm. 

The  constant  general  tendency  of  prices  of  merchandise  is 
downward.  Competition  tends  to  reduce  prices  and  lessen  profits. 
To  offset  these  diminishing  profits,  firms  aim  to 
Borrow\*ng^°'  ^°  ^  larger  volume  of  business  and  make  the  ex- 
pense proportionately  less.  This  requires  greater 
capital  to  introduce  improved  machinery,  put  more  sales- 
men on  the  road,  or  otherwise  improve  the  facilities  of  the  house, 

37X 


272  BORROWING    AND    LENDING    MONEY. 

and  acts  as  an  incentive  to  the  firm  to  resort  to  the  money 
lender. 

As  a  country  grows  older  and  the  surplus  earnings  of  the 
people  are  carried  over  from  year  to  year,  there  is  an  in- 
creased amount  of  money  seeking  borrowers,  and  competition 
of  money  against  money  tends  to  reduce  the  rate  of  interest,  thus 
enabling  borrowers  to  meet  the  falling  market  prices  of  their 
wares  and  yet  pay  the  ruling  rate  of  interest  for  borrowed 
capital.    The  machinery  for  massing  capital,  such  as  the  savings 

banks  which  gather  up  the  little  rivulets  of  wealth. 
Lenders  trust  Companies,  insurance  companies  and  banks, 

becomes  more  numerous  and  efficient  and  the 
knowledge  of  the  conditions  of  financial  safety  in  business,  such 
as  reports  on  the  credit  of  firms  and  corporations,  also  becomes 
more  thorough  and  reliable,  so  that  the  whole  process  of  borrow- 
ing and  lending  in  business  is  facilitated  and  made  less  hazardous. 
To  take  advantage  of  these  trade  forces  and  use  them  properly 
is  the  province  of  the  financier. 

The  inexorable  law  of  supply  and  demand  obtains  in  the 
money  market  the  same  as  in  other  things.  Money  is,  a  com- 
modity, and  at  times  it  is  in  greater  demand  than  at  others,  the 
same  as  other  commodities.  Supply  and  demand,  as  they  affect 
the  money  centers,  affect  the  entire  money  market  to  a  greater 
or  less  degree.  Thus  a  "tightness"  of  money  in  Wall  Street, 
or  an  unusual  demand  for  money  there,  causes  a  rise  in  the  rate 
of  interest,  and  money  at  once  flows  to  New  York,  perhaps 

causing  a  rise  in  the  rate  of  interest  through  the 
Market*"*^  couutry.  In  the  agricultural  districts  of  the  West, 

when  the  great  crops  of  corn  and  wheat  must  be 
carried  to  market  in  the  autumn,  a  large  amount  of  money  is 
needed,  and  the  banks  aim  to  so  time  their  loans  as  to  have  a 
good  supply  on  hand  at  that  time.  In  the  sugar  and  cotton 
districts  of  the  South  the  crops  are  ready  for  market  in  December 
and  January,  and  these  make  a  profitable  demand  for  money. 


THE    MONEY    MARKET.  273 

In  the  states  where  wool  is  extensivdy  raised,  the  time  of  the 
wool  clip  in  the  spring  brings  need  for  an  increased  volume  of 
money,  and  thus  the  law  of  demand  and  supply  affects  the  money 
market  and  regulates  the  rate  of  interest,  the  same  as  it  affects 
other  commodities. 

The  largest  borrowers  of  money  are  the  great  corporations 
and  syndicates  which  aim  to  secure  in  this  way  a  portion  of  the 
capital  which  they  require  at  a  low  rate  of  interest  and  use  it  at 
a  profit  to  themselves.  Instead  of  issuing  commercial  paper,  as 
in  the  case  of  firms,  their  borrowings  are  evidenced  by  bonds 
secured  by  a  mortgage  upon  the  property  of  the  company. 
These  bonds  are  sold  to  the  public  generally  in  large  or  small 
quantities.  A  company  earning  six  per  cent,  on  its  stock  could 
sell  bonds  to  the  amount  of  half  its  capital  on  a 
basis  of  five  per  cent,  interest,  and  thus  on  the  same  earn- 
ings, pay  seven  per  cent,  dividends  on  its  capital  stock.  This 
is  a  legitimate  proceeding  and  affords  a  gain  which  the  officers 

of  any  corporation  may  rightfully  take  advantage 
Corporations        of.    While  the  bonds  of  large  corporations  are  sold 

to  the  public  generally,  those  of  small  corporations 
seldom  reach  the  public.  Such  companies  borrow  from 
the  banks  chiefly,  like  firms  and  individuals,  and  owing  to  the 
limited  liability  of  the  stockholders  for  the  debts  of  the  company, 
the  banks  frequently  require  in  addition  to  the  obligation  of  the 
corporation  a  personal  guaranty  from  the  officers.  This  gives  the 
bank  a  claim  not  only  against  the  assets  of  the  company  in  case 
the  loan  is  not  paid,  but  also  against  the  officers  personally. 

The  precise  limit  up  to  which  a  corporation  or  firm  may 
properly  borrow  is  hard  to  define.    It  is  very  close  to  that  point 

at  which  its  paper  floats  at  par  drawing  ordinary 
BoTrowLg  interest.    When  a  concern  must  sell  its  paper  at  a 

heavy  discount,  it  is  evidence  that  it  is  over  bor- 
rowing. In  order  to  hold  its  bonds  at  par  companies  sometimes 
offer  a  higher  rate  of  interest  than  the  usual  rate.    But  this  is  a 


274  BORROWING    AND    LENDING    MONEY. 

public  confession  of  the  weakness  of  the  paper.  Occasionally 
a  corporation  will  issue  bonds  bearing  a  low  rate  of  interest  and 
sell  them  below  par.  This  is  questionable  financiering,  since  the 
face  value  of  the  bonds  must  be  paid  at  maturity.  Thus  a 
corporation  desiring  to  raise  $1,000,000  issues  bonds  bearing 
4  per  cent,  and  sells  them  at  80.  In  order  to  realize  the  amount 
of  cash  needed,  viz.,  $1,000,000,  it  must  issue  $1,250,000  of 
bonds,  and  at  maturity  these  must  be  paid.  This  is  equivalent 
to  paying  a  bonus  of  $250,000  on  the  sale  of  its  bonds.  It  is  an. 
example  of  that  human  tendency  to  postpone  troubles,  or  re- 
lieve the  present  by  borrowing  from  the  future.  We  may 
therefore  conclude  that  to  issue  bonds  or  other  obligations  at 
too  high  a  rate  of  interest,  or  sell  them  at  a  discount,  is  a  viola- 
tion of  the  rules  of  good  financiering  and  indicates  over  borrow- 
ing. With  individuals  or  firms  it  may  be  said  that  a  concern 
should  not,  under  ordinary  conditions,  borrow  more  than  half  its 
net  worth. 

The  great  money  lenders  are,  of  course,  the  banks.  Borrow- 
ers are  a  necessity  to  a  bank,  and  it  will  loan  to  responsible 
borrowers  to  any  reasonable  and  proper  limit.  Bank  loans  are 
i^ade  chiefly  by  discounting  paper  for  depositors.  Notes  and 
acceptances  running  ninety  days  or  less,  given  for  the  sale  of 
merchandise,  and  hence  representing  the  value  of  goods  or  other 
property  bought  or  sold,  is  a  desirable  class  of  paper  for  discount. 
The  value  is  behind  such  paper,  and  it  may  be  said  to  represent 
the  property.  A  customer  of  a  bank  need  not  hesitate  to  offer 
for  discount  any  paper  of  this  class  which  is,  in  his  opinion^ 
Desirable  g^^d,  but  ou  the  other  hand  he  should  not  be 

Paper  for  offeuded  if   his  banker  refuses  to    discount   the 

Bank  Discount  p^per,  evcu  without  giving  reasons.  The  banker 
may  be  in  possession  of  information  concerning  the  other  parties 
to  the  paper  which  the  holder  is  not,  and  yet  cannot  disclose  that 
information.  Every  customer  of  a  bank  who  keeps  an  account 
of  any  consequence  is  considered  as  entitled  to  a  "line  of  dis- 


BANK    LOANS.  275 

count"  in  proportion  to  his  usual  balance  in  the  bank  and  finan- 
cial standing  in  general.  The  limit  of  this  "line"  is  agreed  upon 
with  the  bank  officials  from  time  to  time,  and  the  customer  sends 
in  for  discount  such  notes  and  drafts  as*he  may  have  which  he 
regards  as  good  up  to  the  limit  of  his  "line." 

Banks  aim  to  have  diversified  borrowers.  By  this  is  meant 
those  in  various  lines  of  business,  whose  needs  come  at  different 
times  of  the  year.  If  the  bank  had  all  one  class  of  borrowers 
they  would  all  want  their  money  at  the  same  time;  also  at  that 
time  draw  down  their  deposits,  and  the  bank  would  find  itself 
without  the  necessary  funds  to  advance.  In  order  that  the  bank 
may  at  all  times  be  ready  to  meet  the  demands  of  its  customers, 
it  aims  to  have  a  volume  of  money  loaned  to  persons  having 

no  "line  of  credit"  and  whom  the  bank  can  ask 
Call  Loans  to  retire  their  indebtedness  on  short  notice.     In 

large  cities  some  banks  have  from  25  to  50  per 
cent,  of  their  loans  made  to  borrowers  who  do  not  deposit  with 
the  bank,  and  to  whom  the  bank  is  under  no  obligations  to 
extend  the  loan  for  any  definite  period  of  time.  Such  loans  are 
made  to  stock  brokers,  and  are  usually  payable  on  demand. 

If  a  business  man  borrows  of  a  bank  a  sum  of  money  on  his 
note,  and  gives  as  security  a  pledge  in  the  form  of  other  notes, 
shares  of  stocks  or  bonds,  such  pledge  is  called  "collateral."  The 
collateral  does  not  become  the  property  of  the  bank,  and  the 
bank  is  responsible  for  its  safe  keeping  and  return  to  the  owner. 
Loans  on  collateral  are  usually  evidenced  by  notes  in  which  a 
clause  is  inserted  giving  the  bank  the  right,  in  case  there  is 

default  in  the  payment  of  the  note,  to  sell  the 
couaterri  Collateral  and  apply  the  proceeds  of  such  sale  to 

the  liquidation  of  the  note,  the  residue,  if  any,  to 
be  returned  to  the  owner  or  debtor.  The  trend  of  the  times  is 
for  banks  to  loan  on  collaterals  and  less  on  the  individual  notes  of 
borrowers,  but  there  are  cases  where  collaterals  cannot  be  readily 
furnished.    The  merchant  has  a  stock  of  goods  upon  his  shelves 


276  BORROWING    AND    LENDING    MONEY. 

but  this  cannot  be  placed  in  the  vaults  of  banks,  like  stocks  or 
bonds.  But  merchants  and  others  who  borrow  on  individual 
notes  are  required  from  time  to  time  to  furnish  their  banks 
with  statements  of  their  financial  condition,  drawn  from  their 
books.  The  experienced  banker  is  not  only  able  to  read  and 
interpret  this  statement,  but  reads  between  the  lines  the  future 
of  the  business,  and  advances  credit  accordingly.  In  case  interest 
coupons  attached  to  collaterals  mature  while  in  possession  of  the 
bank  the  owner  is  usually  allowed  to  collect  or  cash  them. 
Collaterals  as  security  depend  upon  their  character.  The  highest 
quality  of  collaterals  is  United  States  bonds,  and  from  this 
their  value  descends  to  almost  nothing.  Banks  aim  to  leave 
a  liberal  margin  below  the  market  value  of  any  collateral,  so  as  to 
realize  the  amount  of  their  loan  in  case  of  forced  sale.  Many 
classes  of  collaterals  are  shifting  in  value  and  of  varying  degrees 
of  security.  The  banks  will  exercise  care  to  see  that  the  party  is 
not  borrowing  too  much,  and  that  the  bank  is  not  getting  a  large 
part  of  its  assets  tied  up  in  one  class  of  securities. 

It  is  a  good  rule  that  all  firms  should  be  out  of  debt  at  least 
once  a  year,  and  better,  twice  yearly;  otherwise  the  banker, 
through  his  loans,  supplies  in  fact  a  part  of  the  capital  to  the 
concern,  becoming  a  silent  partner  with  no  share  in  the  profits, 
and  every  chance  to  make  a  loss.  This  does  not  apply  to  stock 
brokers,  who  borrow  entirely  on  collaterals,  and  who  use  their 
money  to  carry  their  customers.  They  are  constantly  in  the 
market  for  loans,  which  they  secure  for  their  patrons,  enabling 
Loans  for  them  to  buy  and  sell  various  stocks  and  bonds 

Speculative  in  which  they   expect   to   realize   a  profit.      Oc- 

Purposes  casioually  in  New  York,  Chicago  and  other  large 

cities  speculation  runs  very  high,  and  many  men  having  good 
business  become  interested  in  the  stock  market,  and  unbeknown 
to  their  bankers  and  friends  carry  stocks  on  a  margin  with 
some  broker,  who  is  perchance  borrowing  the  money  for  him  at 
the  broker's  bank.    Such  practices  on  the  part  of  business  men, 


DOCUMENTARY    BILLS.  277 

if  discovered,  will  seriously  injure  their  credit,  and  bankers  are 
ever  on  the  alert  to  discover  a  customer  who  is  speculating,  and 
to  discountenance  the  operation. 

When  property  is  on  its  way  to  market  with  a  certainty  or 
probability  of  early  sale,  it  is  a  legitimate  object  on  which  banks 
loan  as  collateral.  In  fact  one  of  the  chief  functions  of  a  bank 
is  to  bridge  over  the  period  of  time  between  production  and 
consumption.  When  merchandise  is  shipped  for  sale  either  in 
the  home  or  foreign  market,  bills  of  exchange  are  drawn  upon  the 
consignee,  and  if  accompanied  by  a  specific  pledge  of  the  prop- 
erty in  the  form  of  a  bill  of  lading,  are  called 
Documentary  ^^documentary  bills."  A  very  large  part  of  the 
grain,  live  stock  and  cotton  of  the  country  is  car- 
ried to  market  in  this  manner.  The  property  is  protected  by 
insurance  in  favor  of  "whom  it  may  concern,"  and  the  bank,  by 
holding  possession  of  the  documents,  holds  title  to  the  property 
until  the  draft  is  paid. 

Another  form  of  collateral  used  extensively  in  business  as 
security  for  bank  loans  is  warehouse  receipts.  Produce  or  other 
property  may  be  withheld  from  market  for  a  better  price,  and 
while  being  so  held  it  is  placed  in  a  warehouse  and  the  regular 
form  of  warehouse  receipt  taken  for  it.  This  receipt  then  may  be 
used  as  collateral  to  a  note  for  discount  at  bank. 
R^cetpt^s"^*  It  represents  the  property  and  carries  constructive 

possession  of  the  property  with  it.  No  one  can 
withdraw  the  produce  or  other  property  from  the  warehouse 
without  showing  the  receipt  properly  endorsed.  Loans  on  this 
class  of  collaterals  are  not,  however,  regarded  with  much  favor 
by  banks,  since  the  time  which  the  property  is  to  be  held  in  store 
is  indefinite,  and  the  market  value  is  uncertain,  making  the 
loan  indefinite  as  to  time  of  payment,  and  the  security  liable  to 
fluctuation.  Loans  of  this  character  are  accommodation  loans 
and  often  have  to  be  inconveniently  prolonged. 

Accommodation  paper  consists  of  notes  or  drafts  made  or 


278  BORROWING    AND    LENDING    MONEY. 

signed  for  the  express  purpose  of  securing  a  loan,  and  do  not 
represent  a  bona  fide  business  transaction.  Sometimes  the  ac- 
commodation consists  only  of  an  endorsement  upon  a  note  or 

draft  created  by  the  person  who  desires  the  accom- 
«onTapef  ^'        modatiou;  it  may  consist  of  the  acceptance  of  a 

draft.  But  whatever  form  accommodation  paper 
may  assume,  banks  and  money  lenders  do  not  regard  it  favorably. 
It  is  not  regarded  as  legitimate  business  paper  like  the  draft  or 
note  executed  on  the  basis  of  a  sale  of  goods.  Accommodation 
paper  can  be  collected  legally,  for  the  law  protects  the  bank  or 
any  other  innocent  third  party  who  takes  the  paper  in  the 
ordinary  course  of  business,  without  knowing  its  want  of  con- 
sideration between  the  original  parties,  and  the  obligator  to 
such  paper  must  pay.  This  protection  of  third  parties  to  com- 
mercial paper  is  a  necessary  safeguard  to  enable  it  to  be  readily 
sold  and  transferred.  Accommodation  notes  and  accommodation 
endorsements  are  not  as  common  in  this  generation  as  in  the 
past.  Many  an  old  man  plods  along  to-day,  poor,  but  wiser  for 
his  experience  in  endorsing  paper  for  a  friend,  perhaps  many 
years  ago.  That  one  fatal  act  reduced  him  to  penury,  from  which 
he  was  never  able  to  recover.  Business  men  of  to-day  have 
learned  to  conduct  transactions  upon  safer  and  better  methods, 
perhaps  owing  to  the  experience  and  good  advice  of  their  fathers. 
A  class  of  dealers  in  commercial  paper  called  note  brokers 
handle  considerable  paper  of  merchants  and  manufacturers,  and 
re-discount  with  the  banks.  The  note  broker  is  a  convenience 
to  both  the  merchant  and  bank — to  the  former  by  buying  his 
paper  and  thus  furnishing  him  with  funds  which  he  may  need 
in  his  business — to  the  bank  by  selling  paper  to  it  whereby  it  is 

enabled  to  employ  its  capital  profitably  when  there 
Note  Brokers        is  a  lack  of  applications  for  discounts  from  its 

regular  customers.  Merchants  can  afford  to  sell 
their  paper  at  6  per  cent,  interest  to  a  note  broker,  and  discount 
their  own  bills  at  1  per  cent,  per  month,  or  better.    The  question 


UNIVERi^lTY 

Of 


J 


NOTE    BROKERS.  279 

arises  at  once,  why  does  not  the  merchant  sell  his  paper  to  his 
bank  directly,  instead  of  selling  it  in  the  "street,"  and  will  not 
his  banker  grant  the  merchant  all  the  credit  he  is  really  entitled 
to,  and  discount  all  of  the  paper  his  capital  and  financial  standing 
will  justify  him  in  uttering?  It  may  not.  The  bank  may  have 
its  funds  loaned  out  up  to  the  limit  and  be  practically  unable 
to  buy  the  merchant's  paper,  even  if  desirable,  while  some  other 
bank  might  be  short  of  good  paper.  The  note  broker,  as  a  sort 
of  go-between,  can  sell  the  paper  wherever  there  is  a  demand  for 
it.  He  may  sell  it  in  another  town  or  city  where  there  is  a  sur- 
plus of  deposits  and  a  dearth  of  loans.  In  some  localities  the 
banking  capital  is  much  larger  than  can  be  profitably  employed 
in  the  immediate  vicinity,  and  consequently  those  banks  invest 
large  sums  through  note  brokers. 

Then  again  a  bank  may  contract  its  loans  at  any  time  by 
selling  notes  previously  purchased  from  a  note  broker.  Such 
notes  are  usually  made  payable  to  the  order  of  the  firm  or  indi- 
vidual signing  them  and  then  endorsed  in  blank.  To  sell  this 
paper  does  not  require  the  bank's  endorsement,  and  it  can  be 
sold  again  through  the  same  class  of  brokers  as  purchased  from. 
When  a  bank  makes  a  loan  to  one  of  its  depositors,  the  note  is 
usually  made  payable  to  the  order  of  the  bank,  and  it  is  not 
customary,  except  in  cases  of  great  need  on  the  part  of  the  bank, 
to  have  this  paper  go  out  of  its  possession.  Business  men  who 
borrow  of  a  bank  do  not  ordinarily  wish  the  bank  to  let  the 
paper  go  out  of  its  possession. 

The  making  and  selling  of  one's  paper  in  the  market,  outside 
of  one's  bank,  and  free  from  the  wholesome  restraint  which  a 
bank  exercises  upon  the  inclination  of  a  class  of  depositors  to 
borrow  beyond  their  proper  limit,  is  a  method  of  business  which 
is  fraught  with  danger  and  liable  to  abuses.  In 
the^syltem  prospcrous  timcs  it  is  apt  to  lead  to  over  trading 

or  to  speculation.  Funds  obtained  in  this  way  can 
be  used  for  any  purpose,  and  are  often  applied  to  other  uses 
than  the  discounting  of  merchandise  bills. 


280  BORKOWINC;    AND    LENDING    MONEY. 

As  a  rule  note  brokers  merely  transfer  the  paper  without 
guaranteeing  its  payment  by  endorsement.  While  the  broker  is 
not  legally  liable  in  ease  the  maker  fails  to  pay,  yet  his  business 
success  depends  upon  the  manner  in  which  the  notes  are  paid, 
and  he  is,  therefore,  exceedingly  anxious  that  they  should  be 
paid  promptly  at  maturity.  He  is  considered  a  guarantor  that 
Responsibility  ^^®  uotcs  are  all  right  in  every  respect,  except  as 
of  the  to  whether  they  will  be  paid  or  not,  and  of  that  the 

bank  or  buyer  is  presumed  to  be  equally  capable 
of  judging.  The  note  broker  must  make  no  misrepresentations 
in  order  to  sell  his  paper.  His  dealings  with  the  buyer  of  his 
paper  require  the  utmost  good  faith  on  his  part.  He  sends  a 
printed  list  containing  a  description  of  perhaps  a  hundred  notes 
to  the  bank.  Each  note  is  numbered  and  if  the  bank  wishes  to 
see  any  of  the  paper,  it  is  sent  upon  application.  Or  a  broker 
or  an  agent  for  him  may  visit  a  bank  personally  and  exhibit  a  list 
of  the  notes  and  acceptances  which  he  wishes  to  negotiate. 

Loans  on  real  estate  security  are  considered  a  desirable  class, 
where  the  intention  is  to  put  out  the  money  for  a  long  time. 
The  lender  usually  does  not  aim  to  loan  a  larger  amount  than 
one-half  or  two-thirds  the  value  of  the  property,  leaving  a  good 
margin  as  an  inducement  to  the  debtor  to  repay  the  loan,  rather 
than  default.  Loans  on  real  estate  are  evidenced  by  a  special 
form  of  note,  and  secured  by  either  a  mortgage  or  trust  deed. 
A  mortgage  is  a  conveyance  of  the  property  to  the  creditor  with 
the  condition  that  if  the  debt  is  paid  the  conveyance  becomes 
void.  It  is  similar  in  many  respects  to  a  deed. 
Loans  ^^^^^^  with  a  Conditional  clause.    A  trust  deed  is  a  con- 

veyance of  the  property  to  some  third  party  called 
a  trustee  in  trust  as  security  for  the  debt.  When  the  debt  is  paid, 
the  trustee  executes  a  release  of  the  conveyance;  that  is,  deeds 
the  property  back  to  the  owner.  Before  loaning  money  on  real 
estate  security,  the  lender  must  satisfy  himself  not  only  as  to  the 
value  of  the  property  and  its  desirability  as  security  for  the  pro- 


KEAL    ESTATE    LOANS.  281 

posed  loan,  but  he  should  have  the  title  examined  by  a  eompetent 
attorney.  An  abstract  of  title  containing  a  history  of  the  con- 
veyances through  which  the  title  has  passed  will  be  furnished 
by  an  abstract  company.*  Having  found  the  title  clear  and 
satisfactory  and  no  judgment  against  the  mortgagor,  the  mort- 
gage or  trust  deed  may  be  executed  and  the  loan  made,  but  no 
time  must  be  lost  in  getting  the  mortgage  on  record  in  the  office 
of  the  recorder  of  deeds  of  the  county  where  the  property  is 
situated. t  The  object  of  recording  is  to  give  notice  of  the  ex- 
istence of  the  mortgage  to  any  one  who  might  wish  to  purchase 
the  property  or  take  a  mortgage  upon  it.  There  may  be  several 
mortgages  on  the  same  property,  the  first  being  entitled  to  prior- 
ity of  payment,  then  the  second,  and  so  on.  In  case  the  debt  is 
not  paid  at  maturity  the  holder  of  the  mortgage  has  a  right  to 
foreclose  and  have  the  property  sold  at  judicial  sale,  the  residue, 
if  any,  after  paying  the  debt,  interest  and  costs,  to  be  returned 
to  the  mortgagor.  After  sale,  the  mortgagor  has  a  period  in 
which  he  is  allowed  to  redeem  the  property  (usually  about  fifteen 
months)  by  paying  up  the  debt  and  all  costs,  etc.,  but  failing  in 
this  the  sale  becomes  absolute.  As  to  the  special  provisions  of 
the  law  in  regard  to  mortgages  or  trust  deeds,  their  foreclosure, 
etc.,  the  statutes  of  the  state  should  be  consulted.  In  case 
the  security  for  a  loan  consists  of  both  land  and  buildings  it  is 
usual  for  the  mortgagor  to  have  the  latter  insured  for  the  benefit 
of  the  mortgagee. 


*We  now  have  title  guaranty  companies  who  guarantee  or  Insure  the 
mortgagee  against  loss  by  any  defect  of  title  in  the  property.  They  are  a 
species  of  insurance  company,  and  their  guaranty  policies  are  extensively 
accepted. 

tThe  best  method  is  to  execute  the  mortgage  or  trust  deed  and  place  it 
upon  record  before  the  abstract  of  title  is  brought  down  to  date.  Then  when 
the  abstract  is  continued  it  will  contain  the  mortgage  or  trust  deed  and 
show  the  contiQuity  of  title  up  to  the  moment  of  the  loan. 


CORPORATIONS, 


CHAPTEE  XXIX. 
CHARACTER    OF    CORPORATIONS. 

FORMATION;    PROMOTION;    KINDS   OF    STOCK;   WATERING    STOCK; 

DIVIDENDS. 

A  corporation  is  an  artificial  person  created  by  law.  It  is  a 
personage  entirely  distinct  from  the  individuals  who  form  it  or 
conduct  its  affairs.  Its  members  may  all  die  and  be  succeeded 
by  others,  but  its  existence  is  not  affected  thereby.  It  continues 
on  indefinitely  or  until  its  charter  expires,  or  is  forfeited  or 
surrendered.  Corporations  are  of  two  kinds,  public  and  private. 
Public  corporations  are  such  as  are  created  for  public  purposes, 
viz.,  cities,  towns,  libraries,  hospitals,  etc.  Private  corporations 
are  such  as  are  conducted  for  private  purposes  and  for  the  benefit 
of  those  directly  connected  therewith,  as  railroad,  bank,  insur- 
ance, manufacturing  and  mercantile  corporations. 
Definition  In  the  casc  of  public  corporations  every  citizen  is 

a  member  of  the  corporation.  In  the  case  of 
private  corporations  only  those  are  members  who  own  shares 
of  stock.  A  close  corporation  is  one  with  a  limited  membership, 
no  stock  for  sale  to  the  public  and  vacancies  filled  by  selection, 
the  prime  object  being  to  keep  the  profits  of  the  company  within 
a  small  circle  or  family  and  immediate  connections.  Many  of 
the  most  profitable  business  corporations  are  conducted  in 
this  way. 

One  of  the  primary  reasons  why  a  corporation,  rather  than  a 
co-partnership,  is  preferred  by  those  intending  to  embark  in  an 
enterprise  is  that  when  the  capital  stock  is  paid  for  by  the 

282 


FORMATION    OF    CORPORATIONS.  288 

stockholders  there  is  no  further  individual  liability  for  debts 
and  obligations  of  the  corporation,  and  in  ease  of  insolvency  and 
failure  of  the  corporation,  their  loss  is  but  the  amount  they 
have  already  invested  when  they  subscribe  to  their  shares  of 
stock.  If  the  stock  is  not  fully  paid  up,  the  stockholder  is 
liable  to  creditors  and  the  corporation  for  the  unpaid  balance, 
while  in  a  co-partnership  business,  conducted  by  individuals,  each 
individual  is  personally  liable  for  the  entire  obligations  of  the 
co-partnership  of  which  he  is  a  member. 

Another  reason  for  preferring  a  corporation  to  a  co-partner- 
ship is  the  facility  it  affords  for  procuring  investments  by  the 
public,  who,  by  reason  of  the  segregation  of  the  entire  capital 
into  numerous  small  shares,  are  enabled  to  make  an  investment 
of  such  amount  as  the  individuals  desire.  This  method  enables 
'jwganizers  and  promoters  to  enlist  in  their  enterprises  the  capital 
of  a  multitude  of  investors,  large  and  small,  which  they  would 
be  unable  to  interest  without  such  form  of  organization. 

Corporations   are   creatures   of   the   state,   and   are   formed 
either  by  special  charter  or  compliance  with  the  requirements  of 
a  general  statute.    At  the  beginning  of  the  century  all  corpora- 
tions in  this  country  were  formed  by  special  char- 
Promotion  ^^^'  ^^^  owiug  to  the  corruptiou  and  bribery  re- 

sorted to  in  order  to  get  charters  passed  through 
the  legislatures  of  the  several  states,  containing  favorable  terms 
and  granting  valuable  privileges  and  monopolies,  the  constitu- 
tions of  most  all  of  our  states  have  been  amended  so  as  to 
prohibit  the  legislatures  from  granting  special  charters.  Many 
corporations  are  formed  for  the  purpose  of  conducting  an  or- 
dinary business  in  competition  with  other  houses,  as  banks, 
railroads,  etc.,  or  for  buying  out  or  "taking  over"  established 
concerns,  while  others  are  formed  especially  to  develop  or  pro- 
mote a  particular  franchise,  invention  or  discovery.  In  the 
latter  case  the  value  of  the  shares  is  largely  fictitious,  being 
based  upon  the  estimated  future  profits  of  the  company.     A 


284  CORPORATIONS. 

large  portion  of  the  capital  stock  goes  to  the  inventor  or  dis- 
coverer or  promoter  of  the  enterprise,  as  payment  for  his 
services,  and  the  rest  is  sold  to  the  public,  usually  at  a  very  low 
price  at  first,  and  an  increasing  price  as  fast  as  the  stock  will 
sell.  It  is  in  the  formation  and  promotion  of  corporations  that 
serious  evils  and  abuses  have  grown  up  in  this  country.  Fraudu- 
lent prospectuses  are  issued  by  skillful  "promoters"  versed  in  all 
the  arts  by  which  stock  is  sold,  representing  that  the  enterprise 
is  fully  afloat  and  the  stock  paid  up,  when  in  fact  it  has  been 
"paid  up"  only  by  worthless  patents,  or  property  purchased 
at  a  gross  over-valuation.  The  number  of  "bubbles"  which  are 
floated  every  year,  and  in  which  the  inexperienced  and  unwary 
lose  their  savings,  is  astounding.  In  England  this  evil  became 
so  great  that  in  1867  a  law  was  passed  requiring  a  public  registry 
of  all  contracts  whereby  stock  was  issued  by  a  corporation  in  pay- 
ment for  any  franchise  or  other  property.  Investigators  claim 
that  over  speculation  is  largely  due  to  the  formation  of  corpora- 
tions that  have  no  real  excuse  for  existence,  except  the  further- 
ance of  the  personal  aims  of  the  promoters.  The  fullest  possible 
publicity  concerning  the  initial  acts  of  every  new  company  is 
believed  to  be  the  only  remedy  for  the  existing  evils. 

It  frequently  occurs  that  subscribing  stockholders  are  not 
required  to  pay  the  full  amount  of  their  stock  upon  subscrip- 
tion, or  when  it  is  issued,  but  that  the  balance  that  may  be  due 
the  corporation  is  subject  to  the  "call"  of  the 
subSrip\kms  directors.  The  usual  penalty  imposed  upon  the 
stockholders  for  failure  to  respond  to  the  "call" 
is  the  forfeiture  and  sale  of  their  stock  upon  reasonable  notice, 
and  the  proceeds  of  such  sale  are  used  to  pay  the  obligation 
contracted  by  the  subscriber.  The  subscriber  is  also  liable  to 
the  corporation  for  unpaid  subscriptions,  and  failure  to  respond 
to  the  "call"  generally  renders  the  subscriber  liable  to  suit  for 
the  recovery  of  the  unpaid  balance. 

In  corporations  conducted  for  the  benefit  and  profit  of  mem- 


KINDS    OF    STOCK.  385 

bers,  the  interest  of  each  is  represented  by  the  number  of  shares 
of  stock  which  he  holds.    These  shares  of  stock  may  be  trans- 
ferred or  assigoed,  and  the  person  to  whom  they 
stoclf  °^  ^^^  ^^^^  transferred  becomes  entitled  to  all  rights 

belonging  to  the  assignor.  In  case  of  death  of  a 
shareholder  his  legal  representatives  succeed  to  the  ownership  of 
the  stock.  The  ordinary  stock  of  a  corporation  is  called  common 
stock  to  distinguish  it  from  preferred  or  other  kinds. 

Each  share  of  stock  in  a  corporation  has  what  is  technically 
termed  a  par  value.  This  means  the  value  indicated  on  the  face 
of  the  stock  certificate  itself,  which  usually  ranges  from  $1  to 
$100  per  share.  A  great  many  mining  corporations  have  stock  at 
a  par  value  of  $1,  while  manufacturing  and  mercantile  corpora- 
tions usually  have  stock  at  the  par  value  of  $100.  Other  cor- 
porations have  stock  at  the  par  value  of  $5,  $10,  $25  and  $50  a 
share.  The  entire  issue  of  stock  is  universally  of  the  same  par 
value.  The  par  value  of  stock  may  differ  from  its 
Ma'Tklt^vlhTJ*  market  value.  The  market  value  of  stock  is 
usually  ascertained  from  what  the  buying  public 
would  pay  for  the  stock  in  open  market.  Some  stocks  have  a 
market  value  much  greater,  even  several  times  greater,  than 
their  par  value.  This  is  usually  caused  by  the  large  earnings 
of  the  corporation  making  the  stock  a  valuable  investment,  and 
the  demand  of  investors  for  stock  regularly  earning  large  divi- 
dends causes  the  market  value  to  appreciate.  It,  of  course, 
naturally  follows  that  there  are  stocks  in  many  corporations  that 
have  no  market  value,  and  others  whose  market  value  is 
less  than  the  par  value.  It  is  not  uncommon  that  stocks  in 
national  banking  corporations  have  a  market  value  largely  ex- 
ceeding the  par  value,  although  the  dividends  are  not  necessarily 
larger  than  stocks  of  other  corporations  of  a  lesser  market  value; 
the  usual  careful  management  of  national  banks,  coupled  with 
the  watchfulness  of  government  officers  over  their  affairs  and  the 
laws  regulating  them,  insures  to  the  public,  in  a  very  large 


286  CORPORATIONS. 

measure,  the  safety  of  the  investment  and  the  stability  of  the 
corporation  itself,  which  frequently  appreciates  the  value  of  the 
stock  of  such  institutions  to  a  higher  market  value  than  stock  in 
other  corporations  earning  much  larger  dividends. 

Preferred  stock  is  that  which  entitles  its  owner  to  profits 
or  dividends  in  preference  to  other  stockholders.  "Guaranteed," 
"preferential/'  "preference"  and  like  expressions  mean  the  same. 
"Interest  bearing"  stock  is  a  species  of  preferred 
stock"*^  stock  similar  to  a  bond,  since  the  company  has 

promised  to  pay  interest  in  the  nature  of  a  fixed 
dividend  upon  such  stock,  in  preference  to  the  common  stock. 
In  case  of  preferred  stock,  its  dividends  are  to  be  paid  out  of 
the  profits  of  the  company  first,  and  the  common  stock  is  then 
entitled  to  what  remains. 

In  the  cases  of  certain  trading  and  manufacturing  concerns, 
instead  of  issuing  bonds  for  borrowed  capital,  they  issue  pre- 
ferred stock,  in  one  or  more  classes,  such  as  first  preferred,  sec- 
ond preferred  and  then  common  stock.  Such  stock  usually  has 
"cumulative"  dividends,  which  means  that  a  dividend  passed 
at  one  period  must  be  made  up  from  future  earnings  before 
the  unpreferred  shares  receive  any  portion  of  the  profits. 

Such  preference  stocks  are  almost  the  same  as  bonds,  the 
difference  being  that  they  may  or  may  not  have  preference  of 
claim  against  the  assets  of  the  company  in  case  of  failure,  de- 
pending upon  the  conditions  under  which  they  were  issued, 
and  the  dividends  are  not  absolutely  due  and  payable,  like  the 
interest  on  a  bond.  In  a  year  of  depression  or  loss  the  dividend 
on  preferred  stock  can  be  passed,  and  will  cumulate,  but  in  the 
case  of  bonds,  if  the  interest  is  not  paid  foreclosure  may  result. 
Therefore  preferred  stock  is  better  for  the  company  than  bonds, 
although  the  holder  of  the  bond  may  feel  more  secure  on  ac- 
count of  the  annual  payments  of  interest  being  obligatory. 

Since  preferred  stockholders  have  rights  superior  to  common 
stockholders,  in  reference  to  dividends,  it  is  essential  that  the 


PREFERRED  STOCK.  287 

creation  of  preferred  stock  should  be  strictly  in  accordance  with 
the  statutes  of  the  state  in  which  the  company  is  organized.  If 
Creation  of  ^^®  stock  is  divided  into  the  two  classes  before 

Preferred  bciug  subscribcd,  evciy  one  subscribing  to  either 

class  of  stock  assents  to  the  conditions,  but  in 
case  a  company  issues  only  common  stock  and  afterwards 
finds  itself  short  of  capital  to  conduct  the  business,  it  may  then 
issue  preferred  stock,  as  a  means  of  raising  funds.  This  can 
only  be  done,  however,  after  a  unanimous  vote  of  all  the  holders 
of  the  common  stock,  properly  certified  to  the  Secretary  of  State 
and  his  permission  received.  The  holders  of  the  common  stock 
thus  agree  to  surrender  the  first  earnings  of  the  company  to  the 
preferred  shareholders  with  the  hope  that  by  means  of  the 
additional  capital  and  good  management,  there  may  be  a  profit- 
able remainder  left  for  them. 

Many  corporations  reserve  in  the  hands  of  the  treasurer  a 
quantity  of  stock  to  be  sold  or  given  away  at  some  future  time, 
as  occasion  or  policy  may  require,  for  the  promotion  of  the 
business.  This  is  called  treasury  stock,  and  is  the  property  of  the 
corporation.  In  case  the  stock  is  given  away  or  sold  at  a  dis- 
count, however,  should  the  company  become  in- 
Treasury  stock  solvcut,  thosc  holding  such  stock  would  be  liable 
to  the  creditors  of  the  company  for  the  difference 
between  the  amount  paid  for  the  stock  and  its  par  value,  and 
this  notwithstanding  the  stock  should  bear  the  words  "paid  up 
stock"  or  "fully  paid  and  non-assessable."  Thus  it  will  be  seen 
that  any  person  who  accepts  stock  as  a  gift  from  a  corporation 
for  his  "influence"  or  on  account  of  his  "standing"  in  the  busi- 
ness community  assumes  a  liability — not  to  the  company  if  the 
stock  is  marked  "paid  up  stock,"  but  to  the  creditors  in  case 
the  company  fails. 

Sometimes  the  stockholders  of  a  corporation,  after  com- 
plete organization  and  during  its  business  life,  donate  by  mutual 
agreement  a  certain  percentage  of  their  stock  to  be  held  in  the 


288  CORPORATIONS. 

treasury  of  the  corporation  and  sold,  and  the  proceeds  used  in 
the  corporate  enterprise.  This  stock  is  also  called  "treasury 
stock."  This  plan  is  often  adopted  by  stockholders  of  an  in- 
solvent corporation  or  of  one  whose  assets  are  impaired,  and  the 
corporation  is  by  that  means  made  solvent.  This  plan  is  resorted 
to  in  many  instances  instead  of  an  increase  of  capital  stock.  An 
increase  of  capital  stock  would  not  benefit  the  corporation  unless 
the  stock  were  donated  to  it,  and  under  the  circumstances  could 
not  be  sold  as  readily  as  the  treasury  stock  donated  in  the  other 
method. 

Watering  stock  consists  in  increasing  the  amount  of  stock 
issued  beyond  the  value  of  the  assets  of  the  corporation.  It 
is  an  art  in  which  the  present  generation  seems  to  have  become 
expert,  and  by  means  of  its  clever  manipulation  great  "oper- 
ations" have  been  financed,  to  the  enrichment  of  the  manipulat- 
ors. Suppose  a  gas  company  has  a  franchise  to  supply  the  city 
and  public  with  gas,  and  charges  what  is  believed  to  be  a  fair 
price  therefor.  After  the  company  is  well  "a-going,"  by  means 
of  good  management  or  through  the  invention  of  improved 
processes  of  manufacture  it  finds  that  it  is  making  a  very  large 

profit  and  will  be  able  to  declare  an  exorbitant 
Watered  Stock      dividend.    Knowing  that  if  the  public  were  aware 

of  its  large  profits  there  would  be  an  immediate 
clamor  for  a  reduction  in  the  price  of  gas,  it  sets  about  increas- 
ing its  capital  stock  to  two  or  three  times  the  original  amount 
and  distributing  it  among  the  stockholders  so  that  the  rate  of 
dividend  will  be  reduced  to  the  normal  income  on  capital. 
Then  again  a  corporation  operating  under  a  franchise  for  a  town 
or  city,  like  a  street  railway,  may  have  a  stipulation  in  its  fran- 
chise that  all  net  earnings  over  a  certain  percentage  shall  be 
paid  into  the  municipal  treasury,  as  a  compensation  for  the  use 
of  the  franchise.  By  watering  its  stock  it  manages  to  keep  the 
percentage  of  earnings  below  the  limit  and  thus  avoids  payment 
of  the  excess  rightfully  due  to  the  municipality. 


WATERED    STOCK,  289 

The  stock  of  a  corporation  is  sometimes  watered  by  the 
officers  or  a  few  large  stockholders  for  their  own  benefit.  They 
represent  that  it  is  necessary  to  largely  increase  the  capital  stock 
of  the  company  in  order  to  enlarge  the  plant,  etc.  After  the 
increase  has  been  voted  by  the  stockholders  and  authorized  by 
the  Secretary  of  State,  the  few  who  are  manipulating  the  deal 
make  a  loan  to  the  company  and  take  the  new  stock  in  abundant 
quantity  as  security.  Of  course  there  is  a  default  in  the  payment 
of  the  loan  when  due  and  the  stock  becomes  the  property  of  the 
lenders.  In  the  case  of  many  corporations  of  a  speculative  char- 
acter the  stock  consists  largely  of  water  from  the  first,  the  actual 
assets  bearing  a  small  proportion  to  the  capitalization  of  the 
company.  The  officers  and  promoters  sell  the  stock  to  outsiders 
until  they  have  secured  sufficient  money  to  conduct  the  enter- 
prise, and  retain  the  balance  (usually  a  large  portion)  for  them- 
selves. This  is  termed  "getting  in  on  the  ground  floor."  Of 
Inducements  coursc  watering  stock  is  an  illegal  proceeding, 
to  stock  usually  engaged  in  for  the  purpose  of  deceiving 

Watering  ^^^  public,  and  may  be  punished  by  the  revocation 

of  the  company's  charter.  But  an  increase  of  the  capital  stock 
above  the  tangible  assets  to  a. point  which  will  include  the  value 
of  the  franchise  or  "good  will"  is  perfectly  legitimate,  for  the 
latter  may  be  the  most  valuable  asset  of  the  company.  Corpora- 
tions are  sometimes  inclined  to  place  a  very  large  valuation  upon 
the  "good  will"  or  franchise,  especially  if  they  are  earning  large 
dividends,  owing  to  the  prejudice  in  the  public  against  larger 
dividends  than  the  usual  rate  of  interest  on  loans.  A  firm  may 
earn  10  or  15  per  cent,  upon  its  capital  and  nothing  is  said  or 
thought  of  it,  but  if  that  firm  should  organize  into  a  corporation 
and  earn  the  same  profits,  it  would  be  severely  condemned  by 
public  opinion.  Public  sentiment  is  therefore  a  constant  pres- 
sure upon  corporations  to  drive  them  to  stock  watering. 

Money  earned  by  a  corporation  over  and  above  its  expenses 
remains  the  property  of  the  company  until  the  directors  declare 


290  CORPORATIONS. 

a  dividend,  when  it  becomes  the  property  of  the  individual  stock- 
holders. The  company  may  then  distribute  the  entire  net  earn- 
ings as  dividends  or  it  may  reserve  part  of  the  earnings  of  a 
prosperous  year  to  make  up  for  possible  lack  of  profits  in  future 
years,  or  it  may  invest  a  portion  of  its  net  earnings  in  improve- 
ments of  the  plant  and  distribute  the  remainder  as  dividends. 

Again  it  may,  by  vote  of  the  stockholders,  declare 
Dividends  a  stock  dividend,  that  is,  a  dividend  payable  in 

stock  instead  of  cash.  This  is  equivalent  to  an 
increase  of  the  capital  stocl  of  the  company  and  must  be  certi- 
fied to  the  Secretary  of  State.  A  stock  dividend  is  perfectly 
legitimate  and  proper  when  the  entire  net  earnings  of  the  busi- 
ness are  needed  to  improve  the  plant,  thereby  increasing  its  value 
to  correspond  with  the  increase  of  the  capital  stock,*  When 
stock  is  sold  the  dividend  goes  to  the  buyer,  unless  otherwise 
agreed,  and  unless  the  dividend  has  been  declared.  If  the  divi- 
dend has  been  declared  it  becomes  in  a  sense  separated  from 
the  stock  and  is  the  personal  property  of  the  one  who  owned  the 
stock  at  the  time  it  was  declared. 

Fictitious  dividends  are  those  which  are  supposed  to  be  earned 
by  the  company,  but  are  really  paid  out  of  the  capital  or  from 
borrowed  money.  The  object  is  to  deceive  stockholders  into 
believing  that  the  company  is  prosperous  when  it  is  not,  thereby 

inducing  them  to  purchase  more  stock  or  persuade 
Dividends  ^^^^^  friends  to  do  so.    When  stockholders  become 

suspicious  false  statements  are  made  as  to  the  earn- 
ings, expenses,  value  of  the  franchise,  etc.,  and  thus  they 
are  quieted,  while  the  manipulators  of  the  company's  affairs 


♦The  issuance  of  a  stock  dividend,  although  in  many  respects  analogous 
to  stock  watering,  is  not  open  to  the  same  objection,  since  the  issuance  of 
the  additional  stock  does  not  involve  a  marking  up  of  the  book  value  of  the 
company's  assets  beyond  their  actual  value.  Some  of  the  best  managed 
companies  pursue  the  policy  of  paying  very  small  cash  dividends  and  capi- 
talizing their  surplus  accumulations  in  this  way  from  time  to  time,  thus 
keeping  most  of  the  earnings  in  the  business  while  giving  the  stockholders 
what  amounts  to  a  fair  return  on  their  investment. 


DIVIDENDS.  291 

perhaps  are  selling  out  or  "unloading"  their  stock  quietly,  at  a 
good  price,  leaving  the  corporation  wrecked.  In  rare  instances, 
however,  fictitious  dividends  may  be  justifiable.  Thus  when 
a  succession  of  prosperous  years  is  followed  by  one  of  disaster  and 
loss,  after  which  the  business  promises  good  returns  again,  it 
may  be  proper  to  continue  the  same  dividends  through  the  bad 
year,  rather  than  destroy  the  regularity  of  them  to  stockholders. 
An  illustration  of  this  policy  is  the  Chicago,  Burlington  & 
Quincy  Railroad  Company.  In  1888  the  company  suffered  se- 
verely on  account  of  a  strike  among  its  locomotive  engineers. 
Though  frankly  admitting  that  no  dividends  were  earned  that 
year,  the  company  paid  the  usual  dividend  rather  than  disturb 
the  value  of  its  stock  and  disappoint  shareholders.  Under  the 
circumstances  this  was  justifiable. 

Corporations  are  not  permitted  in  law  to  declare  and  pay 
dividends  upon  stock  when  their  assets,  at  a  fair  valuation,  are 
not  sufficient  to  pay  their  outstanding  indebtedness  to  creditors  in 
full,  and  if  directors  and  officers  of  a  corporation  knowingly 
declare  and  pay  dividends  under  such  circumstances,  they  are 
generally  held  individually  liable  for  all  of  the  existing  debts 
and  obligations  of  the  corporation  and  those  subsequently  con- 
tracted. The  payment  of  such  dividends  is  considered  a  fraud 
and  has  in  instances  been  indulged  in  to  procure  to  the  stock- 
holders assets  of  the  corporation  which  should 
Ditrtdends  hsL^Q  gone  to  the  payment  of  corporate  indebted- 

ness. As  long  as  the  corporation  is  solvent  and 
has  ample  assets  with  which  to  discharge  its  existing  indebted- 
ness, there  is  usually  no  restraint  upon  paying  dividends,  though 
unearned.  This  is  a  dangerous  proceeding,  at  all  events,  and 
the  creditors,  whose  obligations  have  accrued  subsequent  to 
the  payment  of  such  dividends,  are,  under  some  circumstances, 
permitted  to  recover  from  the  stockholders  the  dividends  so  paid, 
when  subsequent  insolvency  demonstrates  that  the  capital  was 
impaired  by  such  payment  of  dividends,  and  suspension  of  busi- 
ness and  failure  followed. 


292  CORPORATIONS. 

The  surplus  fund,  reserve  fund,  or  sinking  fund  is  the  ac- 
cumulation of  a  portion  of  the  net  profits  of  the  corporation 
set  aside  each  year  as  a  contingent  fund  to  liquidate  a  debt,  meet 
reverses  or  enable  the  company  to  declare  a  uniform  rate  of 
dividend  whether  the  earnings  are  uniform  or  not.  For  the 
purpose  of  marketing  the  stock  and  avoiding  the  fluctuations  in 

value  which  would  be  caused  by  a  fluctuating  divi- 
Surpius  dend,  the  surplus  fund  is  created,  and  if  the  net 

earnings  should  fall  below  the  usual  minimum 
dividend  limit,  the  surplus  is  then  drawn  on  for  the  deficiency. 
This  enables  the  company  to  declare  a  uniform  dividend,  gives 
better  satisfaction  to  the  stockholders,  who  know  about  what 
dividends  to  expect,  and  makes  the  stock  much  more  salable  and 
desirable  to  investors. 

A  sinking  fund  may  be  created  to  meet  an  outstanding  obliga- 
tion falling  due  at  some  future  date.  If  it  is  a  bond  issue,  the 
deed  of  trust  given  as  security  for  the  bonds  usually  provides 
that  a  certain  sum  shall  be  set  apart  out  of  the  net  profits  and 
paid  to  the  trustee.  The  trustee  then  invests  these  sums  in  the 
company's  bonds  of  the  issue  to  be  retired,  or  any  other  issue  of 
the  company,  according  to  the  provisions  of  the  trust  deed,  and 
these  are  held  in  trust  until  the  final  settlement,  when  the  ma- 
tured bonds  are  canceled  and  returned  to  the  corporation.  The 
trust  deed  may  provide  that  the  trustee  is  to  invest  the  sinking 
fund  in  bonds  of  other  companies  or  it  may  be  left  to  his  dis- 
cretion. 


CHAPTER  XXX. 

CORPORATIONS— Continued. 

DIRECTORS;   DUTIES   OF   OFFICERS;   BY-LAWS;    RECORDS. 

The  owners  of  the  stock  of  a  private  corporation,  as  soon 
as  the  charter  is  granted  by  the  state  and  the  corporation  fully 
organized,  proceed  to  choose  and  elect  a  board  of  directors,  and 
the  board  of  directors,  after  their  election,  proceed  among  them- 
selves to  elect  the  officers  of  the  corporation.  It  is  generally  neces- 
sary that  at  least  a  portion  of  the  directors  must 
DiTecto^rs  ^^  rcsidcuts  of  the  state  which  granted  the  cor- 

porate charter.  The  number  of  directors  ranges 
from  three  up  to  practically  as  many  directors  as  is  considered 
necessary  to  conduct  the  business  of  the  corporation. 

It  is  usual  in  large  corporations  doing  an  extensive  business 
to  elect  directors  in  three  classes,  one-third  to  be 
elected  for  one  year,  one-third  for  two  years  and  one-third  for 
three  years.  The  reason  for  this  is  to  prevent  a  complete  change 
in  the  board  of  directors  at  any  one  election.  Good  business 
prudence  demands  that  a  large  proportion  of  the  directors  re- 
main in  office  because  of  their  familiarity  with  the  details  of  the 
business  being  conducted.  If  this  method  is  adopted,  at  the 
expiration  of  one  year  from  the  first  election  an  election  would 
be  held  to  elect  directors  to  fill  the  places  of  those  elected  for 
one  year,  thus  retaining  in  office  the  two  remaining  classes 
whose  terms  have  not  expired,  and  so  on  with  the  other  classes 
of  directors  as  their  terms  of  office  expire. 

The  directors,  immediately  after  their  election,  hold  a  meet- 
ing called  a  "directors'  meeting."  At  this  meeting  the  directors 
elect  the  officers  of  the  corporation,  which  usually  consist  of 
a  president,  secretary  and  treasurer.     Other  officers  of  the  cor- 


294  CORPORATIONS. 

poration  are  frequently  a  number  of  vice  presidents^  an  assistant 
secretary  and  an  assistant  treasurer.  These  are  customary  officers 
of  large  corporations  and  not  usual  in  small  concerns. 

It  is  generally  the  duty  of  the  board  of  directors  to  formulate 
and  adopt  by-laws  which  are  made  for  the  government  of  the 
officers,  directors  and  affairs  of  the  corporation. 
By-Laws  These  by-laws  are  required  by  law  to  be  reason- 

able and  to  be  in  conformity  with  the  provisions 
of  the  charter  and  the  statutes  of  the  state  under  which  the 
corporation  is  organized.  The  by-laws  should  prescribe  the 
number  of  directors,  the  offices  to  be  filled  by  election,  the 
mode  and  manner  of  calling  general  and  special  stockholders' 
meetings,  general  and  special  meetings  of  directors,  general  and 
special  elections  of  the  directors  and  officers,  and  the  duties  of 
the  individual  directors,  officers  and  agents  of  the  corporation, 
and  should  provide  for  the  term  of  office  of  the  directors  and  of- 
ficers to  be  elected. 

The  president  of  a  corporation  is  usually   considered  the 
legal  head  of  the  corporation,  and  when  an  act  pertaining  to 
the  business  of  the  corporation  is  performed  by 
President  him,  it  is  Considered  that  he  has  binding  authority 

to  act  as  the  agent  of  the  corporate  body.  The 
president,  however,  is  subject  to  the  regulation  of  the  board  of 
directors  and  also  to  the  restrictions  and  regulations  prescribed 
in  the  by-laws. 

The  general  duty  of  the  secretary  is  that  of  custodian  of  the 
books  and  records  of  the  corporation  and  the  corporate  seal, 
and  to  attach  the  corporate  seal  to  written  instruments  when 
required.     The  president   and   secretary  are   the 
Secretary  officcrs  usually  authorized  by  the  board  of  direct- 

ors to  execute  any  instrument,  note,  bond,  bill  of 
sale,  etc.,  in  the  corporate  name,  and  under  the  corporate  seal, 
that  may  be  necessary  to  be  executed  by  the  corporation. 

The  usual  duties  of  the  treasurer  are  those  of  a  fiscal  agent, 


BY-LAWS.  295 

to  keep  the  funds  of  the  corporation  in  some  safe  depository, 
to  keep  the  officers  and  directors  informed  as  to  the  financial 
condition  of  the  corporation  and  the  amount  of  funds  in  its 
treasury,  and  to  prepare  and  keep  the  financial  records  of  the 
corporation.  The  treasurer  is  the  officer  usually  empowered  to 
sign  checks  and  to  pay  out  the  funds  of  the  cor- 
Trcasurer  poration,  but,  like  the  president  and  secretary,  he 

is  bound  by  the  by-laws  and  should  never  pay 
out  money  in  any  large  amount  unless  specifically  authorized 
by  the  board  of  directors  to  do  so,  or  unless  the  corporate  business 
is  such  and  the  by-laws  so  stipulate,  that  such  payment  should 
be  considered  one  of  the  regular  duties  of  the  treasurer. 

The  by-laws  of  a  corporation  should  provide  for  frequent 
stated  meetings  of  the  directors,  who  should  assemble  at  the 
general  offices  of  the  company  under  parliamentary  rules  of 
order,  and  in  such  manner  transact  the  business  of  the  corpora- 
tion. The  president  of  the  corporation,  by  virtue  of  his  office, 
presides  as  chairman  of  the  meeting.  Reports  from  the  treas- 
urer and  secretary  and  of  the  general  manager  (in 
Dh-ectora°  corporations  where  there  is  such  officer)  are  read, 

and  from  the  reports  and  recommendations  of 
those  officers  the  business  is  taken  up.  It  becomes  the  duty  of 
the  secretary  to  keep  full  and  complete  "minutes"  of  what  trans- 
pires at  the  directors'  meetings  as  well  as  at  the  stockholders' 
meetings.  These  "minutes"  should  be  transcribed  fully  into  a 
book  kept  for  that  purpose,  known  as  a  "minute  book."  The 
business  should  be  transacted  by  resolutions  voted  upon  by  the 
president  putting  the  question  and  calling  for  "Yeas"  and 
"Nays."  The  majority  favoring  or  disapproving  a  resolution 
generally  decides  the  action  of  the  directors  upon  the  matter. 

The  duty  of  the  secretary  in  keeping  and  in  transcribing 
these  "minutes"  is  a  very  important  one,  as  often  very  important 
transactions  are  invalidated  or  made  uncertain  by  carelessly  or 
mistakenly  transcribed  "minutes."    Every  reasonably  important 


296  CORPORATIONS. 

act  of  a  corporation  should  be  first  voted  upon  by  tbe  board  of 
directors  and  the  resolution  correctly  transcribed  into  the  *^min- 
ute  book"  by  the  secretary.    The  "minutes"  when 
Secretary  transcribed   into   the   minute   book   should  show 

what  directors  and  officers  were  present  and 
those  that  were  absent,  and  should  always  show  that  a  "quorum'* 
was  present.  A  quorum  is  the  number  of  stockholders  or 
directors,  usually  a  majority,  prescribed  by  the  laws  of  the 
state  and  the  by-laws  of  the  corporation  as  being  necessary  for 
the  holding  of  a  valid  meeting  for  the  transaction  of  corporate 
business,  and  if  a  meeting  is  called  and  there  is  not  a  quorum 
present,  the  meeting  has  no  power  to  transact  any  business  ex- 
cept to  adjourn  to  some  particular  time  and  place.  A  very  im- 
portant duty  of  the  board  of  directors,  which  is  frequently 
neglected  and  omitted,  is  the  auditing  of  current  bills  owing 
by  the  corporation,  and  ordering  the  treasurer  to  make  proper 
payment.  Great  evils  have  grown  out  of  the  practice  of  allowing 
a  treasurer  to  audit  and  pay  bills  at  his  own  discretion.  The 
best  regulated  corporations  always  strictly  observe  this  rule. 

When  the  minutes  of  the  corporation  are  transcribed  by 
the  secretary  into  the  minute  book  they  should  be  signed  by  the 
president  of  the  corporation  and  "attested"  by  the  secretary. 
These  signatures  are  very  strong  marks  of  authenticity  and 
should  never  be  omitted.  Under  no  circumstances  should  min- 
utes be  transcribed  upon  loose  sheets  of  paper 
Minutes  and   kept  unbound    or   pasted   into   the   minute 

book  instead  of  having  them  written  therein  in 
regular  manner.  It  is  usual  at  the  next  succeeding  meeting  of 
the  directors  or  stockholders  to  "approve"  or  order  "corrections" 
in  the  minutes  of  the  preceding  meeting  as  the  case  may  re- 
quire, and  the  subsequent  approval  of  the  minutes  confirms 
the  prior  resolutions  and  the  acts  of  the  various  officers  perform- 
ing them. 

The  secretary  of  a  corporation  should  keep  a  book,  called 


OFFICERS.  397 

a  "stock  certificate  book/'  from  which  book  stock  certificates 
should  be  issued  and  a  record  kept  of  the  date,  the  number  of 
shares,  and  to  whom  issued,  and  where  stock  is 
certfficates  transferred  from  a  stockholder  to  any  person  the 

original  certificate  should  be  surrendered  and  the 
secretary  should  issue  a  new  certificate  in  lieu  of  the  old  one, 
which  should  be  canceled  and  attached  to  its  former  stub  in 
the  certificate  book  and  proper  record  kept  of  the  transaction. 
It  is  usual  to  include  in  the  by-laws  a  provision  for  the 
removal  from  office  of  directors  or  officers  in  the  event  that 
the  majority  may  deem  it  for  the  best  interests  of 
offi^err'°  ^^^  corporation.     This  provision  is  usually  fol- 

lowed by  a  further  provision  giving  directors  the 
power  of  appointing  a  successor  or  of  calling  a  special  election, 
to  fill  the  vacancy  caused  by  such  removal. 

The  officers  and  directors  of  a  corporation  are  required  to 
be  particularly  careful  that  no  act  is  done  by  the  corporation 
which  is  in  violation  of  the  laws  of  the  state  or  of 
Illegal  Acts  the  powcrs  conferred  by  the  charter.     The  direct- 

ors and  officers  are  personally  liable  for  such  illegal 
acts,  and  it  frequently  subjects  the  corporation  to  the  liability 
of  a  forfeiture  of  its  charter. 

The  directors  of  a  corporation  must  act  as  a  board  and  not 
singly.  Several  directors  cannot  bind  the  corporation  by  their 
several  acts  unless  the  acts  are  directly  within  the  scope  of  their 
authority.  All  contracts — conveyances  of  corporate  property — 
the  creation  of  corporate  liability — should  be  authorized  by  the 
board  of  directors  in  meeting  assembled.  The  authority  should 
be  by  resolution,  which  should  be  fully  transcribed  into  the 
minute  book  by  the  secretary.  Directors  who 
Important  ^^^^  ^^  ^^^^^  ^y^q  corporation  by  their  individual 

acts,  subsequently  repudiated  by  the  corporation, 
are  personally  liable  to  the  aggrieved  party.  It  sometimes  be- 
comes necessary,  on  account  of  some  emergency,  that  the  officers 


m  CORPORATIONS. 

of  a  corporation  consisting  usually  of  president,  secretary  and 
treasurer,  are  called  upon  to  perform  an  important  act  before 
it  is  possible  to  convene  a  meeting  of  the  board  of  directors. 
Such  acts  are  excusable  under  the  circumstances,  but  should 
immediately  be  ratified  by  the  board  of  directors  in  regular 
manner.  If  power  to  perform  important  acts  is  conferred  by 
the  by-laws  upon  any  of  the  officers  of  the  cor- 
signature  poration,  the  board  of  directors  at  frequent  inter- 

vals should  call  a  meeting  and  ratify,  approve  and 
confirm  the  acts  of  the  officers,  letting  the  minutes  show  in 
detail  the  acts  and  transactions  confirmed. 

Where  the  corporate  signature  is  required  to  be  signed  to 
written  documents,  it  should  be  the  name  of  the  corporation 
"by  its  president"  and  "attested"  by  its  secretary  and  sealed  with 
the  corporate  seal.  An  example  of  a  proper  corporate  signature 
is  as  follows: 

'The  Chicago  Coal  Mining  &  Quarrying  Co., 

By  John  Doe,  President. 
Attest:    Eichard  Eoe,  Secretary. 
[Imprint  of  corporate  seal.] 

The  seal  of  a  corporation  is  generally  a  device  embossed 
upon  the  document  to  be  signed,  being  the  name  of  the  corpora- 
tion, with  the  location  of  its  principal  place  of  business,  as 
"Chicago,  111."  and  the  word  "seal."  The  "attaching"  or  "affix- 
ing" of  the  seal  is  the  act  of  imprinting  the  device  upon  the 
document  to  be  executed. 

Seals  were  in  olden  times  used  as  signatures  by  individuals, 
and  originated  from  the  ignorance  of  the  masses  of  the  common 
people,  who  were  unable  to  write  their  signatures.     Upon  the 
advent  of  corporations,  which,  being  unable  to  phy- 
Seai  sically  do  any  act,  or  to  write  a  signature,  a  "cor- 

porate seal"  was  used  as  the  supreme  designation 
of  a  corporate  signature,  the  signatures  and  attestations  of  its 
officers  being  considered  of  less  consequence  than  the  "affixing" 


OFFICERS.  2d9 

of  the  corporate  seal.  At  the  present  time  it  is  not  always  neces- 
sary, but  advisable,  to  attach  or  affix  the  corporate  seal  to  all 
documents  executed  in  the  name  of  the  corporation.  The  "adop- 
tion" of  a  corporate  seal  is  one  of  the  first  acts  of  the  directors  of. 
a  corporation.  The  by-laws  should  prescribe  the  style  of  seal 
and  designate  the  officer,  universally  the  secretary,  to  be  the 
custodian  of  it  and  affix  it. 

The  existence  of  a  corporation  can  be  terminated  at  the  will 
of  the  stocknolders,  who  may,  by  voting  so  to  do,  surrender  the 
charter  of  the  corporation  to  the  Secretary  of  State  to  be  can- 
celled. Before  this  can  be  done,  however,  proof 
Ex^tcnce°°  °  must  be  furnished  the  Secretary  of  State  that  all 
the  corporate  debts  have  been  paid  and  the  remain- 
ing assets  and  property  distributed  to  the  shareholders.  This 
plan  often  becomes  advisable  when  the  corporate  enterprise  is  no 
longer  considered  profitable,  and  to  further  maintain  the  cor- 
poration would  mean  an  unprofitable  expenditure  of  time  and 
money  by  the  stockholders. 


CHAPTER  XXXI. 

CORPORATIONS— Continued. 

SUBSIDIARY  CORPORATIONS;  CONTROL  AND  MANIPULATIONS. 

Subsidiary  or  auxiliary  companies  are  those  which  are 
formed  or  controlled  by,  or  are  dependent  upon  some  large  com- 
pany. It  frequently  becomes  necessary  in  order  to  promote  the 
success  of  a  corporation  to  organize  a  subsidiary  company  as  a 
feeder  or  helper,  for  the  purpose  of  carrying  out  a  particular 
part  of  the  enterprise,  such  as  supplying  the  corporation  with 
raw  material,  disposing  of  its  finished  product,  called  a  "selling 
company,"  constructing  buildings  or  bridges,  called  a  "construc- 
tion company,"  etc.  It  may  be  that  the  parent  company 
has  not  sufficient  means  to  properly  carry  out  a  subordinate  pur- 
pose or  develop  an  enterprise  which  will  be  collat- 
Confpa'i^es  ^^^^  ^^^  ^^^J  beneficial  to  the  company.     A  new 

and  subordinate  company  may  then  be  formed  out 
of  the  capital  furnished  by  those  stockholders  of  the  parent  com- 
pany who  may  have  money  to  invest,  and  the  building  or  other 
property  of  the  subsidiary  company  may  then  be  leased  to  the 
parent  company.  Thus  a  railroad  company,  through  a  subsidiary 
corporation,  builds  a  hotel  at  a  summer  or  winter  resort  where 
one  is  needed,  hoping  thereby  to  increase  its  passenger  travel,  or 
develops  large  sugar  plantations  along  its  line  to  add  to  its 
freight  traffic.  An  electric  street  car  company  needing  a  new 
power  house  and  not  having  the  necessary  funds  with  which  to 
build  it,  and  not  wishing  to  issue  bonds  or  increase  its  capital 
stock,  forms  a  subsidiary  company  by  which  the  power  house 
is  built  and  leased  to  the  controlling  company.  Nearly  all  of 
our  railway  systems  have  branch  lines,  which  at  greater  or  less 

300 


SUBSIDIARY  COMPANIES.  801 

length  reach  from  the  main  line  into  some  agricultural  section 
or  to  mines  or  cities  located  away  from  the  main  line.  In  this 
way  transportation  facilities  are  furnished  to  distant  sections 
and  an  outlet  is  afforded  them  for  their  products,  while  the 
earnings  of  the  main  line  are  perceptibly  increased  by  the  busi- 
ness brought  to  it.  Sometimes  these  branch  lines  have  been 
expensive  to  build,  where  the  attempt  is  to  reach  some  min- 
ing district,  and  the  money  for  their  construction  was  obtained 
by  issues  of  branch  line  bonds  by  the  subsidiary  company  which 
may  have  been  guaranteed  by  the  parent  company  or  were  made 
valuable  on  account  of  a  lease  contract  with  the  controlling  com- 
pany whereby  the  income  of  the  branch  road  is  assured,  and  the 
interest  on  its  bond  issue  and  sinking  fund  is  provided  for. 

Another  reason  for  the  formation  of  subsidiary  or  auxiliary 
corporations  is  the  manufacture  and  control  of  by-products. 
Take,  for  instance,  a  corporation  engaged  in  mining  coal.  It 
frequently  becomes  necessary  in  developing  the  vein  of  coal  to 
remove  a  large  quantity  of  fire-clay,  also  a  red  shale,  which 
products  in  themselves  are  valueless  to  the  coal  mining  cor- 
porations, but  a  subsidiary  or  auxiliary  company  is  formed  for 
the  purpose  of  manufacturing  the  fire-clay  into  fire-brick  or 
other  marketable  product,  and  another  corporation 
By-Products  ^^  formcd  for  the  purpose  of  preparing  and  vend- 
ing the  red  shale,  which  is  a  cheap  and  excellent 
material  used  in  the  construction  of  roads.  These  companies 
are,  of  course,  dependent  upon  the  "parent"  corporation  for  their 
raw  material  and  are  usually  related  by  contracts  specifying  the 
price  to  be  paid  for  this  material,  and  requiring  that  the  parent 
corporation  shall  furnish  such  quantity  of  raw  material  as  may  be 
agreed  upon  as  being  sufficient  for  the  purposes  of  the  subsidiary 
corporation. 

Perhaps  the  reason  most  frequently  met  with  for  the  forma- 
tion of  subsidiary  companies  is  where  a  corporation  owning 
patent  rights  or  franchises  parcels  out  the  territory  which  it 


302  CORPORATIONS. 

controls   to   various   subsidiary   organizations,   which   may   pay 
yearly  royalties  or  percentages,  or  may  pay  for  the  privileges 
they  get  by  giving  a  ^*lump  sum"  in  cash,  or  by 
TerritoT^°^  giving  the  parent  company  a  part  of  their  capital 

stock,  or  by  a  combination  of  all  of  these  "consid- 
erations." In  this  way  the  stockholders  of  the  parent  company 
avoid  much  of  the  risk,  and  also  the  necessity  of  raising  a  large 
cash  capital.  This  method  has  been  pursued  by  the  American 
Bell  Telephone  Company  and  other  well  known  companies  with 
signal  success.  Subsidiary  companies,  while  being  distinct  cor- 
porations, are  dependent  upon  the  controlling  company,  usually, 
for  their  existence,  and  almost  universally  for  their  financing 
and  management  to  a  considerable  extent. 

Auxiliary  companies  are  sometimes  the  medium  through 
which  profits  that  should  belong  to  stockholders  of  the  parent 
company  are  diverted  to  the  pockets  of  the  directors  and  their 
associates.  In  the  history  of  railroad  building  in  the  United 
States  there  are  many  instances  where  the  man- 
ManipuStions  agcrs  of  a  railroad  company  have  organized  a  so- 
called  "construction  company"  to  build  an  exten- 
sion to  its  lines,  and  have  then  formed  a  separate  corporation  in 
which  the  ownership  of  the  extension  was  nominally  vested, 
and  which  proceeded  to  make  a  contract  with  the  construction 
company  to  build  and  equip  its  line,  paying  for  it  with  its  bonds, 
issued  for  an  amount  in  excess  of  the  actual  cost,  and  also  with 
its  entire  capital  stock,  which  by  some  fiction  of  bookkeeping  was 
made  to  appear  paid  up  in  cash.  The  extension  having  been 
built  with  the  proceeds  of  the  bonds,  or  perhaps  a  part  of  them 
only,  the  next  step  was  to  sell  or  lease  the  new  line  to  the  old 
company  on  terms  that  made  the  stock  held  by  the  construction 
company  a  valuable  asset.  This  and  the  remaining  bonds,  if  any, 
could  then  be  divided  in  kind  or  sold  and  the  proceeds  dis- 
tributed in  cash.  The  morality  of  such  a  transaction  as  this  is, 
to  say  the  least,  questionable,  though  judgment  should  not  be 


CORPORATE  CONTROL.  808 

passed  in  any  specific  instance  without  full  knowledge  of  all  the 
facts. 

Of  late  corporations  have  been  organized  for  a  new  functicn^ 

i.  e.  that  of  holding  a  controlling  interest  of  the  stock  of  other 

corporations.     The  validity  of  these  "parasite  corporations/'  as 

they  have  been  called,  is  yet  to  be  passed  upon  by 

Securities  -j-jjg  courts.    If  permitted  to  stand,  they  mav  have 

Companies  r  •    •  i?    " 

far  reaching  consequences  by  giving  a  few  men 
control  of  large  interests,  although  owning  comparatively  little 
capital.  Let  us  consider  the  case  of  a  stockholding  corporation 
with,  say,  $60,000,000  capital  and  this  capital  invested  in,  say, 
51  per  cent,  of  the  stock  of  a  railroad  capitalized  for  $100,000,- 
000.  The  holders  of  a  bare  majority  of  the  stock  of  the  stock- 
holding or  parasite  corporation  would  then  exercise  control 
over  both  corporations.  Thus  $30,000,100  of  stock  would  be 
able  to  control  $100,000,000  of  capital.  But  let  us  carry  this 
one  step  further  and  suppose  a  majority  of  the  stock  of  the 
parasite  corporation  held  by  another  company  of  the  same  kind 
with  a  capital  of,  say,  $31,000,000.  The  owners  of  only  a  little 
over  $15,500,000  of  its  stock  would  then  exercise  effective  con- 
trol of  the  $60,000,000  company,  and  through  it  of  the  $100,- 
000,000  company.  This  is  an  instance  of  a  lesser  corporation 
controlling  a  greater.  It  is  diametrically  the  opposite  of  the 
subsidiary  corporation.  An  example  of  a  parasite  corporation 
is  the  Northern  Securities  Company,  recently  organized  for  the 
purpose  of  merging  the  control  of  the  Great  Northern,  Northern 
Pacific   and  Chicago,   Burlington   &   Quincy   Railroads.     This 

attempt  of  merger  has  been  declared  illegal  by  the 
Merger  niegai       courts  ou  the  grouud  of  public  policy,  since  such 

a  combination  would  remove  competition,  the 
three  roads  being  nearly  parallel.  The  method  of  controlling 
a  greater  corporation  by  means  of  a  securities  company  holding 
a  majority  of  the  stock,  however,  is  a  legal  proceeding,  in  all 
of  those  states  where  one  corporation  is  permitted  by  statute 


804  CORPORATIONS. 

to  own  shares  in  another.    It  is  merely  an  extreme  exercise  of 
the  principle  of  "majority  rule." 

Stockholding  corporations  designed  to  control  greater  cor- 
porations hy  means  of  the  majority  rule,  as  outlined  above,  savor 
somewhat  of  the  methods  of  the  so-called  "trusts/'  which  will 
be  considered  in  the  next  chapter. 


CHAPTER  XXXII. 

CORPORATIONS— Continued. 

COMBINATIONS;   TRUSTS;    PROMOTION;    UNDERWRITING. 

The  word  trust  has  been  perverted  during  recent  years  from 
its  proper  signification.  Properly  speaking,  trusts  are  of  many 
kinds,  but  they  all  imply  the  placing  of  property  or  power,  or 
both,  in  the  hands  of  agents  who  are  called  trustees,  and  whose 
functions  in  relation  thereto  may  be  so  broad  as 
"  Trust°°  °^  ^^  permit  the  widest  possible  scope  in  the  manage- 
ment of  a  business  or  the  exercise  of  authority,  or 
they  may  be  limited  to  the  merely  nominal  holding  of  title 
without  any  discretion  or  authority  whatever,  as  in  the  case  of 
real  estate  held  for  the  benefit  of  another.  Trusts  of  this  char- 
acter are  as  old  as  human  law  and  as  varied  as  human  experience. 
An  example  of  a  pure  trust  may  be  found  in  what  is  known  in 
modern  financiering  as  the  "voting  trust." 

A  voting  trust  is  an  arrangement  whereby  the  stockholders 
of  a  corporation  part  with  their  voting  power  for  a  specified 
time  or  term,  and  thus  for  such  time  give  up  their  control  over 
the  affairs  of  the  company.  The  object  is  to  prevent  changes  of 
management  which  might  arise  in  case  a  majority 
Voting  Trusts  of  the  stock  should  change  hands,  thereby  per- 
haps greatly  diminishing  its  value  by  radical 
changes  of  policy.  If  all  or  a  majority  of  the  stock  is  placed 
in  the  hands  of  trustees,  who  give  in  return  trust  certificates 
entitling  the  holders  to  their  dividends  the  investment  becomes 
separated  from  the  management.  Holders  of  trust  certificates 
may  transfer  their  holdings,  but  the  management  continues 
unchanged.  The  Reading  Railroad  is  an  example  of  a  corpora- 
tion controlled  and  managed  by  a  voting  trust.     This  form  of 

305 


306  CORPORATIONS. 

trust  is  chiefly  for  the  protection  of  bondholders,  who  are  thus 
assured  of  a  uniform  management  of  the  corporation  by  com- 
petent and  experienced  men,  who  will  see  that  the  interest  upon 
the  bonds  is  promptly  paid,  and  the  sinking  fund  provided  for. 

The  rapid  growth  and  development  of  the  manufacturing 
interests  of  the  United  States  during  the  last  twenty  years  of  the 
nineteenth  century  put  into  vigorous  operation  the  laws  of  trade, 
one  of  which  is  that  as  industries  grow  in  volume  they  tend  to 
centralize\  The  large  establishments  can  make  and  sell  cheaper 
than  the  small  ones.  They  can  buy  the  raw  material  cheaper, 
avail  themselves  of  the  most  approved  machinery  and  employ 
the  best  skill  and  business  ability.  Fierce  competition  is  con- 
stantly hammering  down  prices  and  the  effect  is  to  drive  con- 
cerns into  combinations  whereby  they  may  increase  their  capital 
and  secure  the  benefits  of  a  large  volume  of  business.  This 
tendency  was  manifest  some  years  ago  in  the  formation  of  cor- 
porations and  changing  of  partnerships  to  corporations.  The 
same  causes  continued  to  operate  and  produce  the  combination 
of  corporations  into  trusts. 

A  trust  may  be  defined  as  a  combination  of  the  capital  of 
several  corporations  under  one  management  whereby  the  cost  of 
production  is  reduced,  the  amount  of  production  limited  and 
regulated,  and  the  cost  of  the  article  to  the  consumer  is  con- 
trolled. Attempts  were  first  made  some  years  ago  to  secure  the 
benefits  of  co-operation  between  manufacturers  by 
Trusts  agreements  to  sell  through  a  common  agent,  and 

at  agreed  prices,  but  the  courts  held  such  agree- 
ments to  be  not  binding,  and  members  often  secretly  violated 
them,  so  that  it  became  necessary  to  make  an  absolute  transfer 
of  the  property  of  each  member  to  the  trust.  A  trust  takes  the 
management  and  ownership  of  the  property  out  of  the  hands 
of  the  various  corporations  composing  it,  and  deprives  them  of 
the  power  to  withdraw  their  assent. 

The  method  of  procedure  in  the  formation  of  a  trust  is  for 


TRUSTS.  807 

each  of  the  parties  to  incorporate  his  establishment,  if  it  is  not 
already  incorporated.  The  stock  of  these  various  corporations 
is  then  turned  over  to  the  managers  of  the  trust,  called  trustees, 

and  in  return  for  it  the  trustees  issue  trust  cer- 
How  Formed       tificatcs  similar  in  some  respects  to  shares  in  a 

corporation.  These  certificates  recite  that  the 
holder  is  a  beneficiary  of  the  trust  to  the  extent  of  so  many 
shares;  and  the  certificates  are  assignable  and  transferable  in  the 
same  manner  as  certificates  of  stock,  though  their  legal  status  is 
in  many  respects  dissimilar.  It  will  be  perceived  that  under  this 
exchange  the  trustees  hold  a  majority  of  the  stock  in  each  of 
the  corporations  and  are  able  to  elect  the  directors  and  officers 
of  each  concern  and  thus  control  the  management  to  the  smallest 
detail.    They  can  close  one  factory,  enlarge  another,  consolidate 

others,  regulate  the  output  generally  and  control 
Trust'^°  *         the  price.     Those  concerns  which  refuse  to  join 

the  combination  are  crushed,  if  possible,  by  com- 
petition. The  certificate  holders  are  not  injured  by  the  closing 
up  of  this  or  that  establishment  belonging  to  the  trust,  since 
their  profits  come  from  the  whole  organization  and  not  from 
any  particular  part.  The  holders  of  trust  certificates  elect  trus- 
tees annually,  and  with  the  performance  of  that  function  their 
power  ends.  The  trust  certificates  are  watered  to  the  point 
where  the  rates  of  dividends  will  be  very  moderate,  and  then 
sold  upon  the  stock  exchange  like  other  stock. 

This  organization  is  called  a  trust  because  the  stockholders 
part  with  their  voting  power,  and  practically  repose  absolute 
power  in  the  trustees.  The  acts  of  the  trustees  and  books  of 
account  are  usually  not  open  to  inspection  by  the  certificate  hold- 
ers. No  limit  is  placed  on  the  amount  of  the  trust  certificates 
that  may  be  issued,  and  no  question  can  be  raised  as  to  the  exer- 
cise of  discretionary  power  by  the  trustees.  There  is  practically 
no  limit  placed  upon  the  powers  of  the  trustees  in  conducting  the 
business. 


808  CORPORATIONS. 

The  greatest  trusts  formed  in  this  manner  were  the  Standard 
Oil  Trust,  the  Cotton  Seed  Oil  Trust  and  the  Sugar  Trust,  but 

there  seems  no  longer  to  be  any  doubt  that  a  trus  j 
Trusts  Illegal        formed  in  this  way  is  illegal.    Eecent  decisions  of 

our  courts  have  so  declared,  on  the  ground  of 
public  policy.  Hence  it  is  that  a  large  number  of  the  trusts  are 
now  adopting  a  different  mode  of  organization — that  of  the  cor- 
poration plan,  as  exemplified  by  the  Diamond  Match  Company. 
That  company's  plan  was  to  organize  one  gigantic  corporation 
and  have  it  buy  up  and  own  outright  all  of  the  competing  manu- 
factories, paying  for  them  either  in  cash  or  shares  of  stock. 

This  form  of  organization,  although  called  a  trust. 
Corporations        ^^  ^^  reality  a  great  corporation,  and  it  is  certainly 

better  to  have  the  large  corporation  than  the  trust. 
The  unlimited  power  possessed  by  the  trustees  in  the  case  of  a 
trust,  their  concealment  of  the  condition  of  the  business,  and  the 
secrecy  of  their  acts,  is  dangerous  not  only  to  the  financial  wel- 
fare of  the  certificate  holders  but  also  to  the  public. 

There  is  another  class  of  corporations,  which  are  formed  by 
the  consolidation  of  several  corporations  into  one.  The  method 
of  forming  such  a  consolidated  corporation  is  to  have  the  stock- 
holders of  two  or  more  existing  corporations  vote  to  consolidate. 
This  gives  birth  to  a  new  corporation.  The  old  corporations 
are  merged  into  the  new,  and  although  the  new  corporation  may 

take  the  name  of  one  of  the  old  corporations,  it 
ofCorporations     nevertheless  bears  the  same  relation  to  all  of  them. 

The  new  corporation  issues  capital  stock  to  the 
stockholders  of  the  consolidated  corporations,  sometimes  share 
for  share,  sometimes  upon  an  increased  capitalization.  The  new 
corporation  is  liable  for  all  the  debts  and  obligatiojis  of  each  of 
the  consolidated  corporations,  and  succeeds  to  all  the  property, 
credits  and  effects  which  belonged  to  each  at  the  time  of  the 
consolidation.  Notice  must  be  given  to  the  Secretary  of  State 
of  the  action  of  the  corporations  in  consolidating,  and  they  must 


TRUSTS.  .         309 

record  the  proceedings  resulting  in  the  consolidation,  with  the 
Secretary  of  State,  and  usually  in  the  county  where  the  principal 
office  of  the  corporation  is  maintained. 

Industrial  corporations  are  those  which  are  engaged  in  the 
manufacture  of  the  great  utilities  of  life,  such  as  steam  engines, 
harvesting  machines,  electrical  apparatus,  steel  or  oil.  By  com- 
bining these  into  a  virtual  monopoly,  the  waste  and  expense 
incident  to  competition,  such  as  numerous  traveling  salesmen, 
advertising  and  office  expenses  are  saved  and  thus  the  net  profits 
are  greatly  increased.  Owing  to  the  ability  of  the  combine  to 
earn  net  profits  greater  than  the  total  profits  of  the  different 
concerns,  under  the  competitive  system,  the  combine  may  be 

capitalized  for  a  much  larger  amount  than  the  total 
indusu^fs  capitalization  of  the  individual  concerns.    Most  of 

the  large  companies  in  the  United  States  are 
financed  in  New  York,  owing  to  the  superior  facilities  there  for 
such  transactions  on  account  of  its  greatness  as  a  financial  center. 
Suppose  there  are  a  dozen  companies  engaged  in  the  same  line 
of  business  with  a  total  capital,  say,  of  $30,000,000.  After  look- 
ing the  field  over  carefully,  and  acquainting  themselves  with 
the  present  and  prospective  earnings  of  the  various  properties, 
the  promoters  conclude  to  combine  these  into  a  single  corpora- 
tion with  a  capitalization  of  $100,000,000.  A  corporation  is 
organized  with  a  hundred  millions  capital,  thirty  millions  of 
which  is  to  be  preferred,*  and  seventy  millions  common  stock. 
A  suitable  name,  suggestive  of  the  business  and  comprehensive 
in  scope,  is  chosen.  Arrangements  are  made  by  the  promoters 
with  several  bankers  in  Wall  Street  to  take  portions  of  this 
preferred  stock  and  pay  cash  for  it.  A  block  of  the  common 
stock  goes  along  with  each  sale  of  preferred  stock  as  a  bonus, 
together  with  the  privilege  of  naming  a  member  of  the  board  of 
directors  of  the  new  company.    Each  of  the  old  concerns  is  now 


♦Instead  of  preferred  stock,  bonds  may  be  issued,  and  these  would  be 
preferable  in  case  the  company  expected  to  retire  them. 


310       •  CORPORATIONS. 

bought  up  by  the  new  company,  payment  being  made  in  common 
or  preferred  stock,  or  cash,  or  a  combination  of  all  of  these,  as 
the  parties  may  have  previously  agreed.*  The  new  company 
takes  over  all  assets  and  assumes  all  liabilities  of  the  old  com- 
panies and  provides  a  working  capital  out  of  the  sale  of  the 
preferred  stock.  This  done,  the  combination  is  effected  and  the 
operation  of  the  several  properties  continues  uninterrupted  under 
the  management  of  the  new  board  of  directors  and  officers. 

Having  completed  the  combination  as  outlined  above,  the 
promoters  find  still  left  in  their  hands  a  handsome  block  of  the 
common  and  perhaps  some  of  the  preferred  stock  as  their  com- 
pensation for  putting  the  deal  through.  After  the  combination 
is  made  the  Wall  Street  bankers  first  place  their  preferred  stock 
on  the  market,  and  as  the  business  of  the  new  company  is 
known  to  be  prosperous,  the  stock  sells  readily.  Next  the 
common  stock  is  offered  and  disposed  of,  its  sale  being  aided  by 
that  of  the  preferred  stock. 

The  business  of  promotion  is  a  species  of  agency  especially 
devoted  to  the  organization  of  companies  and  the  floating  of 
stocks  and  bonds.  The  promoter  is  one  who  has  a 
Promotion  financial  acquaintance  and  knows  where  money  for 

various  classes  of  investments  may  be  secured.  It 
is  almost  necessary,  however,  in  order  to  finance  a  large  company 
that  a  bank  or  trust  company  should  be  enlisted  in  the  operation, 
so  that  the  sale  of  securities  will  be  effected  without  any  delay. 
The  bank  or  trust  company  acting  in  this  capacity 
Underwriting  is  kuown  as  an  "underwriter,"  since  it  insures,  or 
underwrites,  the  sale  or  disposition  of  the  se- 
curities, taking  itself  such  as  it  does  not  dispose  of  to  other  bank- 
ers by  a  given  time.     In  this  capacity  a  prominent  New  York 


*In  estimating  the  values  of  the  several  plants,  the  common  method  is 
to  base  the  value  upon  the  average  earnings  for  a  period  of  five  years  past, 
as  shown  by  the  books.  Thus  suppose  it  is  agreed  that  the  property  shall 
be  valued  on  a  10  per  cent,  basis,  and  the  net  earnings  for  five  years  aver- 
age $30,000,  the  plant  would  be  worth  $300,000,  due  consideration  being 
given,  of  course,  to  the  condition  of  the  property. 


MONOPOLIES.  311 

banking  house*  has  achieved  a  world-wide  reputation,  besides 
reaping  immense  wealth  from  its  operations.  Sometimes  the 
promoters  enter  into  contracts  with  one  or  more  bankers  to  the 
effect  that  the  bank  will  buy  a  quantity  of  bonds  upon  the 
property  of  the  new  company  at  a  given  price.  These  contracts 
are  then  deposited  with  a  trust  company  as  collateral  for  a  loan 
sufficient  to  buy  up  the  properties  (the  promoters  having  pre- 
viously secured  options  on  each  property).  After  the  properties 
are  bought,  the  ,bonds  are  issued  and  delivered  and  the  loan  is 
repaid. 

Instances  are  not  uncommon  where  consolidations  are  compli- 
cated by  reason  of  the  companies  which  it  is  desired  to  combine 
owning  public  franchises  which  are  not  transferable.  The  most 
usual  way  of  getting  around  this  difficulty  is  for 
Under^LTascs  ^^^  ^^^  Company  to  hold  the  stock  of  the  old  com- 
panies, or  a  majority  thereof,  in  its  treasury,  and 
to  operate  under  leases  from  the  old  companies.  This  is  the  plan 
followed  in  the  case  of  the  street  railway  systems  in  the  north 
and  west  divisions  of  the  city  of  Chicago,  where  the  situation 
is  still  further  complicated  by  a  majority  of  the  stock  of  two 
companies  holding  such  leases,  being  in  turn  held  by  still  an- 
other corporation — the  Union  Traction  Company. 

The  evil  effects  of  trusts  and  monopolies  can  scarcely  be 
questioned,  but  it  is  far  better  to  have  the  great  corporation, 
although  it  is  in  effect  a  trust,  than  to  have  a  combination  of 
capital  where  its  management  is  confined  wholly  to  trustees 
not  accountable  to  stockholders.  Publicity  is  both  the  prevent- 
ive and  cure  for  a  great  deal  of  rascality  in  the  world.  In  case 
of  the  great  corporation,  it  pays  its  tax  to  the  state,  and  is 
subject  to  proper  limitations.  Creditors  are  able  to  judge  of  its 
financial  condition,  and  the  public  may  determine  whether  it  is 


*J.  Pierpont  Morgan  &  Company.  So  successful  has  this  firm  been  as 
underwriters  that  other  banljers  readily  accept  bonds  and  stocl]:s  offered  by 
them,  and  thus  through  them  promotion  becomes  comparatively  easy. 


812  CORPORATIONS. 

conducting  business  within  the  limits  of  its  charter.  But 
whether  the  trust  is  a  combination  formed  under  the  purely  trust 
method,  or  a  gigantic  corporation,  its  objects  are  the  same:  the 
creation  of  a  monopoly  and  the  control  of  the  market.  For  this 
reason  public  sentiment  is  hostile  to  it.  Judge  Thomas  M. 
Cooley,  a  few  years  ago,  speaking  of  trusts,  said: 

"A  few  things  can  be  said  of  trusts  without  danger  of  mis- 
take. They  are  things  to  be  feared.  They  antagonize  a  leading 
and  most  valuable  principle  of  industrial  life  in  their  attempt  not 
to  curb  competition  merely,  but  to  put  an  end  to  it.  The  case  of 
the  leading  trust  of  the  country  has  been  such  as  to  emphasize 
the  fear  of  them,  and  the  benefits  that  have  come  from  its 
cheapening  of  an  article  of  commerce  are  insignificant  when 
contrasted  with  the  mischiefs  that  have  followed  the  exhibitions 
in  many  forms  of  the  merciless  power  of  concentrated  capital/' 


CHAPTER  XXXIII. 

CORPORATIONS— Continued. 

RECEIVERSHIPS;   REORGANIZATIONS. 

The  affairs  of  private  corporations  are  frequently  wound  up 
under  the  control  of  a  receiver,  who  is  appointed  upon  the 
application  of  some  interested  party  by  a  court,  usually  in  the 
county  where  the  corporation  has  its  principal  place  of  business, 
or  where  some  of  its  property  is  situated.  There  are  many 
grounds  for  the  appointment  of  a  receiver.  Chief  among  them 
is  the  doing  of  some  illegal  act  by  the  corporation  or  its  agents, 
which  would  subject  the  corporation  to  a  forfeiture 
Receiver  of  its  charter,  or  when  the  corporation  refuses  or 

fails  to  pay  a  judgment  or  decree  for  money,  or 
otherwise  is  unable  to  meet  its  obligations.  A  receiver  is  an 
oflBcer  of  the  court.  He  acts  under  the  direction  of  the  court 
and  must  report  all  of  his  doings  to  the  court.  His  chief  duty  is 
J:he  conservation  of  the  company's  property  until  it  can  be  de- 
termined whether  the  business  is  to  be  continued  or  must  be 
wound  up,  and  if  the  latter,  then  to  dispose  of  the  assets  and 
distribute  the  net  proceeds  to  the  proper  persons  as  the  court 
may  direct. 

The  function  of  a  receiver  is  often,  therefore,  a  very  im- 
portant one.  It  frequently  happens  that  the  interest  of  all 
concerned  requires  the  business  to  be  continued  while  proceed- 
ings are  pending,  and  in  such  cases  the  receiver  is  usually  given 
the  necessary  authority.  An  illustration  of  this 
Recetve°/  would  be  in  the  case  of  the  financial  embarrass- 

ment of  a  manufacturing  concern  having  on  hand 
a  large  quantity  of  partly  finished  goods  of  little  value  in  that 
condition,  but  which  by  the  expenditure  of  a  small  amount  of 

818 


314  CORPORATIONS. 

money  could  be  finished  and  marketed  at  a  fair  price.  The 
receiver  thereupon  runs  the  factory  under  the  supervision  of  the 
court,  long  enough  to  complete  the  product  then  under  con- 
struction, which  is  sold  by  the  receiver  wlien  completed,  and 
the  creditors  thereby  receive  a  much  larger  percentage  on  their 
claims  than  would  be  the  case  if  the  product  were  sold  by  the 
receiver  before  its  completion.  The  chief  reason  for  the  appoint- 
ment of  a  receiver,  however,  is  to  enforce  a  ratable  distribution 
of  the  corporate  assets  among  the  creditors. 

A  corporation  is  said  to  be  insolvent  when  its  assets  at  a 
fair  valuation  are  insufficient,  if  sold,  to  discharge  the  existing 
obligations  to  corporate  creditors.     It  is  possible 
Insolvency  that  a  Corporation  may  be  solvent,  yet  its  stock 

practically  worthless.  Such  would  be  the  case  of 
a  corporation  having  just  enough  assets  when  sold  to  pay  cor- 
porate creditors,  leaving  nothing  for  distribution  to  the  stock- 
holders in  return  for  the  sum  invested  by  them  in  their  stock.  ' 
When  a  corporation  becomes  insolvent  or  unable  to  pay  its 
debts,  or  has  exceeded  its  corporate  powers,  a  court  of  equity 
will,  generally  upon  the  application  of  a  creditor  or  stockholder, 
take  charge  of  the  affairs  of  the  corporation  and  appoint  a 
receiver  to  either  continue  or  close  up  the  business,  subject  to  the 
court's  direction.  The  directors  of  a  corporation  formerly  had 
no  power  to  commence  proceedings  for  a  dissolu- 
Receive^s  ^^^^  ^^  ^^®  Corporation  and  appointment  of  a  re- 

ceiver or  for  the  distribution  of  its  assets  among 
the  stockholders,  but  the  Supreme  Court  of  the  United  States 
in  the  Wabash  Eailway  cases  laid  down  the  doctrine  that  a  com- 
pany could  itself  ask  for  the  protection  of  the  court  if  such^ 
was  for  the  best  interests  of  all  concerned.  Under  this  doctrine 
many  corporations  are  placed  in  the  hands  of  "friendly"  receiv- 
ers, by  means  of  proceedings  and  without  notice  to  other  credit- 
ors and  the  public,  thus  opening  the  door  to  great  abuses  of 
corporate  privileges  and  no  doubt  in  many  instances  inflicting 


RECEIVERSHIPS.  315 

serious  loss  and  injury  on  innocent  stockholders.  Directors 
sometimes  mismanage  corporations  in  order  to  get  them  into 
trouble  and  then  by  defaulting  on  the  interest  or  other  obliga- 
tions of  the  company  bring  about  a  receivership  and  reorganiza- 
tion in  order  to  "freeze  out"  and  get  rid  of  the  stockholders  and 
acquire  the  assets,  after  which  the  business  is  continued  pros- 
perously. Corporations  sometimes  procure  the  appointment  of 
friendly  receivers  and  effect  a  reorganization  in  order  to  get 
rid  of  certain  bonds,  guarantees,  leases  or  other  contracts  which 
have  proven  unprofitable.  Such  proceedings,  however,  cannot  be 
justified  on  grounds  of  business  honor. 

Only  stockholders  and  creditors  of  an  insolvent  corporation 
are  concerned  in  the  settlement  and  distribution  of  the  estate. 
The  public  generally  has  no  interest  in  the  matter.  But  in  the 
failure  of  large  corporations  upon  which  the  public  is  accustomed 
to  depend  for  a  particular  service,  like  a  railroad  company,  and 
especially  one  having  subsidiary  companies,  the  public  is  interest- 
ed and  the  matter  brings  up  a  multitude  of  complications.  The 
road  must  be  kept  running.  It  cannot  be  shut  down,  the  property 
sold,  creditors  paid  and  assets  distributed  among  stockholders,  as 
in  the  case  of  an  ordinary  private  business.  Salaries  and  other 
running  expenses  must  be  paid  and  the  business  tided  along 
until  the  entire  property  can  be  sold  in  bulk  or  a  reorganization 
of  the  corporation  is  effected.  When  entering  upon  his 
duties  the  receiver  will  usually  find  many  debts 
Receiverships  Unpaid  and  pressing  repairs  needed,  with  a  con- 
stant deficit  in  cash  to  meet  current  expenses. 
The  court  will  then  authorize  the  issuance  of  receiver's  cer- 
tificates for  the  purpose  of  raising  the  necessary  funds  to  carry  on 
the  business.  These  certificates  are  a  first  lien  upon  the  prop- 
erty of  the  corporation,  coming  in  before  first  mortgage  bonds. 
Sometimes  the  cash  requirements  of  the  receiver  are  met  by  an 
assessment  upon  the  stock  and  bonds  of  the  company.  The 
stockholders  and  boldholders  may  as  well  submit  to  an  assess- 


316  CORPORATIONS. 

ment  as  have  receiver's  certificates  issued,   which  are   a  first 
claim  upon  the  assets. 

Having  the  immediate  necessities  of  the  corporation  pro- 
vided for  in  cash,  the  receiver  usually  finds  it  necessary  to  have 
the  accounts  of  the  company  gone  over  carefully  in  order  to 

ascertain  what  the  actual  earnings  of  the  husiness 
Reorganization     are.     The  prospccts  of  the  future  business  of  the 

company  are  also  taken  into  consideration,  and 
with  these  at  hand  a  reorganization  committee*  or  banking  firm 
is  able  to  determine  what  the  earning  power  of  the  company 
after  the  reorganization  will  be,  and  hence  what  its  capital  may 
be.  If  the  capital  must  be  reduced  in  order  to  bring  it  within 
the  earning  limits,  then  the  bondholders  and  stockholders  must 
suffer  this  loss  in  just  proportions.  Frequently  the  stockholders 
are  required  to  bear  the  entire  shrinkage,  upon  the  principal 
that  to  them  belong  all  the  gains  if  the  enterprise  is  successful, 
and  therefore  they  should  be  willing  to  stand  the  losses.  The 
stockholders,  or  bondholders,  as  the  case  may  be,  pay  in  their 
assessments  to  aid  in  the  continuation  of  the  business  and 
usually  are  given  additional  stock  (preferred)  or  bonds  to  cover 
the  amount  of  the  assessment  so  that  in  case  the  company  in 
future  years  should  become  prosperous,  they  may  bring  forward 
their  claims  for  recognition  and  payment. 

To  adjust  the  respective  interests,  the  reorganization  com- 
mittee may  have  recourse  to  the  issuance  of  stock  in  several 
classes,  some  of  the  shares  being  preferred  as  to  the  payment  of 

dividends,  the  remaining,  or  *^common,"  shares  not 
Reorganisation      ^eiug  entitled  to  participate  until  the  preferred 

stock  has  received  a  certain  percentage,  which  may 
or  may  not  be  cumulativcf  Likewise  there  may  be  an  issue  of 
bonds,  called  "income  bonds,"  upon  which  interest  will  be  paid 


♦The  reorganization  committee  consists  of  representatives  of  tlie  cred- 
itors, stocliliolders  and  bondliolders. 

+  Cumulative  dividends  are  such  as.  if  not  paid,  are  added  to  future 
dividends,  and  thus  accumulate  until  they  are  paid. 


FORECLOSURE.  817 

only  in  the  event  of  its  being  earned.  As  in  the  case  of  dividends 
on  preferred  stock,  the  interest  on  such  bonds  may  or  may  not  be 
cumulative. 

If  a  prop'^r  proportion  of  the  bondholders  of  a  corporation, 
usually  one-half,  are  not  satisfied  with  the  reorganization  as 
outlined  by  the  committee,  or  the  amount  or  kind  of  new  securi- 
ties to  be  given  them  for  their  assessment  under  the  proposed 
plan,  they  may  compel  the  trustees  to  begin  foreclosure  proceed- 
ings, and  when  the  property  is  sold,  bid  it  in  and  take  the  property 
in  payment  of  their  debt.  The  usual  method  in  such  an  event 
would  be  for  the  bondholders  participating  in  this 
Foreclosure  movement  to  form  a  new  corporation  provided 
with  the  necessary  working  capital  so  as  to  be 
ready  to  make  repairs  and  put  the  property  in  good  condition, 
and  also  to  pay  oif  the  non-participating  bondholders  who  would 
be  entitled  to  their  pro  rata  share  of  the  price  realized  at  the 
sale.  This  would  leave  out  the  stockholders  entirely.  The 
new  company  could  then  issue  its  own  bonds  free  from  all 
obligations  of  the  former  corporation. 

William  W.  Cook  says:  "The  object  of  a  reorganization  is  to 
avoid  foreclosure.  The  prospect  of  a  foreclosure  is  the  cause  of  a 
reorganization.  Frequently  the  reorganization  is  made  after  a 
foreclosure  has  been  commenced,  the  object  of  the  foreclosure 
being  to  cut  off  those  persons  who  refuse  to  come  into  the  reor- 
ganization. Sometimes  the  reorganization  practically  does  away 
with  the  necessity  of  foreclosure,  and  this  is  the  ideal  condition 
towards  which  the  times  are  tending." 

Frequently  newly  organized  railroad  companies  and  large 
corporations  issue  bonds  upon  their  property  and  franchises,  os- 
tensibly for  the  purpose  of  raising  funds  for  extending  and 
improving  their  existing  property.  These  bonds,  not  being  paid, 
at  maturity,  a  foreclosure  of  the  bond  issue  results.  The  prop- 
erty is  sold  under  foreclosure  sale  and  a  reorganization  is  had, 
usually  by  a  new  class  of  investors,  the  property  and  franchises 


318  CORPORATIONS. 

transferred  to  the  new  organization,  and  the  original  stockholders 
get  nothing  for  their  investment.    This  is  a  plan  much  favored 

by  unscrupulous  manipulators  and  organizers  who 
Foreclosure  ^^  ^^^^  manipulation  acquire  for  themselves  and 

their  associates  the  amount  originally  paid  in  by 
the  unsuspecting  subscribing  stockholders.  Railroad  and  mining 
corporations  especially  have  been  the  means  of  filching  the  pub- 
lic in  general  of  enormous  sums  by  this  means. 


BONDS. 


CHAPTER  XXXIV. 

GOVERNMENT  AND  CORPORATE  OBLIGATIONS. 

KINDS;    REFUNDING;    NEGOTIATING;    FORECLOSURE. 

A  bond  is  an  obligation  or  promise  to  pay  money,  which 
differs  from  a  promissory  note  in  that  it  is  given  under  seal,  the 
effect  of  which  addition  is,  under  the  common  law,  that  if  default 
is  made  and  payment  has  to  be  enforced  by  suit,  the  maker 
cannot  plead  want  of  consideration. 

When  a  government  desires  to  borrow  money  the  customary 
method  of  obtaining  it  is  to  print  and  offer  its  bonds  for  sale. 
These  are  issued  in  convenient  denominations.  In  this  country 
the  most  common  denominations  are  $500  and 
Bonds""'"'  $1,000,  but  sometimes,  if  the  issue  is  what  is  called 
a  popular  one,  designed  for  sale  among  people  of 
small  means,  a  portion  of  the  issue  is  made  in  denominations  of 
$100,  or  even  less  in  some  instances. 

In  fixing  the  rate  of  interest  which  the  bonds  shall  bear,  the 
government  should,  and  usually  does,  take  into  consideration  the 
condition  of  the  loan  market  (commonly  designated  as  the  money 
market),  and  the  state  of  its  own  credit,  and  makes  the  rate  the 
lowest  one  at  which  it  can  reasonably  expect  to  sell  the  bonds  at 
par.  If  sold  below  par,  the  government  will  pay,  and  the  in- 
vestor will  receive,  more  than  the  rate  of  interest  named  in  the 
bond.  The  reverse  is  true  if  more  than  par  is  realized  for  the 
bonds.  In  general  the  nearer  the  selling  price  can  be  approxi- 
mated to  par  the  more  favorable  will  it  be  for  the  maker,  in  the 
long  run.  Although  it  is  not  possible  for  the  government  to  tell 
what  price  the  bonds  will  bring  until  they  are  placed  upon  the 

319 


830  BONDS. 

market  and  offered  for  sale,  it  is  usually  possible  to  gauge  this 
nearly  enough  for  practical  purposes.  Still,  to  guard  against 
the  contingency  of  unfavorable  bids,  it  is  usual  to  reserve  the 
right  to  reject  any  and  all  that  may  be  submitted,  and  if  all  are 
rejected,  to  make  a  new  offering  at  a  later  date,  with  such  changes 
as  seem  likely  to  yield  a  better  result. 

The  length  of  time  the  bonds  are  to  run  is  also  fixed  by  the 
government,  a-nd  is  a  factor  in  the  price  they  will  bring  in  the 
market.  This  is  because  investors  prefer  bonds  having  compara- 
tively long  terms  to  run,  which  relieve  them  from  the  necessity 
of  reinvesting  at  short  intervals.  Not  infrequently  bonds  contain 
a  clause  giving  the  maker  the  option  to  call  them  in  and  pay 
them  at  any  time  after  a  specified  date.  This,  while  it  enables  the 
maker  to  retire  them  and  stop  the  interest,  usually  causes  them 
to  sell  at  a  lower  price  than  if  they  ran  for  a  fixed  period,  or,  in 
other  words,  the  maker,  in  consideration  of  the  option  of  pre- 
payment, has  to  pay  a  higher  rate  of  interest  for  that  privilege. 

As  a  rule,  government  bonds  are  not  secured,  but  depend 
wholly  upon  the  credit  and  stability  of  the  nation  by  which 
they  are  issued.  In  the  case  of  some  of  the  weaker  nations,  as 
for  instance  Spain  and  China,  some  issues  have  been  secured  by 
a  specific  pledge  of  the  revenue  arising  from  certain  customs 
duties.  This,  however,  is  the  exception  and  not  the  rule  in  the 
case  of  government  bonds.  At  different  times  the  United  States 
government  has  issued  bonds  to  relieve  the  needs  of  its  treas- 
ury. Those  issued  during  the  Civil  War  bore  six  per  cent.,  but 
the  credit  of  the  country  is  now  so  exceptionally  high  that  it  is 
able  to  float  its  bonds  at  the  very  low  rate  of  two  per  cent.,  and 
its  later  issues  have  been  at  that  rate. 

Refunding  consists  in  putting  out  a  new  issue  of  bonds  to 
replace  an  old  one,  which  may  either  have  matured 
Refunding  or  which  may  be  called  for  payment  (the  option 

having  been  reserved)  in  order  to  gain  the  ad- 
vantage of  a  lower  rate  of  interest.     Consolidated  bonds  or 


STATE  AND  MUNICIPAL  BONDS.  321 

"consols"  are  those  issued  to  refund  several  other  issues,  com- 
bining all  into  one. 

Coupon  bonds  are  those  which  are  made  payable  to  bearer 
and  the  interest  on  which  is  evidenced  by  detachable  coupons. 
Coupon  and  Thcsc  coupons  are  torn  off  as  they  fall  due,  and 
Registered  are  usuallj  collectcd  through  some  bank.    Regis- 

^°"**^  tered  bonds  are  so  called  because  the  name  of  the 

owner  is  registered  upon  the  books  of  the  treasury  department 
of  the  government  issuing  them.  Sometimes  the  principal  only 
is  registered  and  the  interest  is  evidenced  by  coupons,  as  in  the 
case  of  bonds  payable  to  bearer.  This  is  the  common  practice 
in  the  case  of  bonds  issued  by  private  corporations.  With  gov- 
ernment bonds  it  is  usual  for  the  interest  to  be  paid  by 
check  mailed  to  the  owner's  address.  The  advantage  of  regis- 
tration is  that  bonds  of  this  kind,  if  lost  or  stolen,  are  of  no 
value  to  the  finder  or  the  thief,  and  hence  are  very  secure. 

In  the  United  States  the  term  government  bonds,  or  "gov- 
ernments," as  they  are  called,  is  limited  to  bonds  issued  by 
the  general  government.  State  bonds,  or  bonds  issued 
by  the  governments  of  the  several  states,  are,  however, 
also  government  bonds,  and  differ  in  no  essential  respect 
from  those  of  the  national  government,  except  as  to  their 
legal  basis.  They  rest  on  the  credit  of  a  part  of  the  people  in- 
state and  stead  of  all  the  people  taken  together.  This  is 
Municipal  truc  also  of  municipal  bonds,  as  those  are  called 
which  are  issued  by  counties,  cities,  towns,  school 
districts,  sanitary  districts,  or  other  public  corporations.  They 
are  usually  put  forth  for  the  purpose  of  raising  funds  for  local 
improvements,  such  as  the  erection  of  public  buildings,  the 
building  of  bridges,  or  of  water  works,  or  of  electric  lighting 
plants.  In  many  of  the  states  municipal  governments  cannot 
issue  bonds  lawfully  in  excess  of  a  certain  percentage  upon  the 
assessed  valuation  of  taxable  property  in  the  municipality,  and 
not  then  unless  authorized  by  a  majority  vote  of  the  people. 


323  BONDS. 

A  generation  ago  it  was  common,  more  especially  in  the 
middle  west,  for  municipalities  to  issue  bonds  to  aid  in  the  con- 
struction of  railroads.  The  burden  of  the  debts  thus  contracted 
bore  heavily  upon  the  people  in  many  instances,  and  suits  were 
brought  by  the  taxpayers  to  test  their  validity.  As  a  result  of  a 
decision  of  the  Supreme  Court  of  the  United  States  that  these 
bonds  must  be  paid,  several  of  the  States  passed  amendments 
to  their  constitutions  prohibiting  towns  or  cities  from  voting 
bond  issues  in  aid  of  railroads. 

"Voluntary  contributions  may  be  obtained  from  the  citizens, 
but  municipal  bonds — bonds  that  must  be  paid  by  the  city  or 
county — can  no  longer  be  issued  in  those  states,"  for  aid  to 
railroads. — Cook. 

Bonds  issued  by  private  corporations  differ  from  those  pre- 
viously mentioned,  chiefly  in  that  they  are  as  a  rule  secured  by 
mortgage  on  the  property  of  the  company  issuing  them.  First 
Bonds  of  mortgage  bonds  are  those  which  are  a  first  lien 

Private  agaiust  the  property  pledged  for  their  payment. 

Corporations  gecoud  and  third  mortgage  bonds  arc  similarly 
secured  by  second  and  third  liens.  In  case  of  foreclosure  the 
first  mortgage  bonds  must  first  be  satisfied  from  the  sale  of 
the  pledged  property.  Then  if  there  is  a  surplus  the  second 
mortgage  bonds  can  be  paid,  in  full  or  in  part,  as  the  case  may 
be,  and  so  on. 

Income  bonds  are  a  peculiar  class  of  obligations.  They  are 
usually  secured  by  mortgage  upon  the  property  of  the  corpora- 
tion, but  they  bear  interest  only  in  the  event  that  the  net  earn- 
ings of  the  company,  after  satisfying  prior  liens,  are  sufficient 
to  pay  it.  Unlike  ordinary  mortgage  bonds,  they 
Income  Bonds  canuot  be  foreclosed  for  failure  to  pay  interest 
unless  the  net  earnings  applicable  thereto  should 
be  willfully  diverted  and  applied  to  other  purposes.  Interest  on 
bonds  of  this  class  must,  however,  be  paid  out  of  the  earnings 
before  any  distribution  of  profits  in  the  way  of  dividends  can 
be  made  to  the  stockholders  of  the  company. 


BOND  ISSUES.  323 

Mortgage  bonds  may  be  secured  upon  lands,  buildings,  manu- 
facturing plants,  telephone  and  telegraph  systems,  street  car 
lines,  franchises,  toll  roads,  bridges,  railroad  rights  of  way  and 
equipment — in  short,  upon  tangible  property  of  all 
Bonds*^^""^  kinds.  Sometimes  the  bonds  are  designated  ac- 
cording to  the  nature  of  the  security,  as  for  ex- 
ample, termina/l  bonds,  which  are  bonds  issued  by  railroad  com- 
panies upon  the  security  of  the  valuable  lands  used  for  stations 
and  office  buildings  and  for  switch  and  storage  yards,  etc.,  in 
the  cities  where  their  lines  terminate. 

Collateral  trust  bonds  are  bonds  issued  by  a  corporation  and 
secured  by  bonds  or  other  securities  owned  by  it  and  deposited 
with  a  trust  company,  or,  it  may  be,  in  the  hands  of  individual 
trustees,  though  the  former  is  more  usual.  This  form  of  bond 
is  sometimes  resorted  to  by  corporations  owning  bonds  of  other 
corporations,  which  they  do  not  wish  to  sell,  or  which  they  may 
not  be  able  to  market  without  their  guaranty.  It  is  most  fre- 
quently used  by  corporations  that  make  real  estate  mortgage 
loans,  which  they  pledge  as  security  for  their  own  bonds  bear- 
ing a  lower  rate  of  interest. 

Debentures  are  unsecured  bonds,  and  are  a  comparatively  rare 
form  of  obligation  for  private  corporations,  owing  to  the  diffi- 
culty of  placing  them  on  favorable  terms. 

Of  many  methods  adopted  to  float  a  bond  issue,  the  most 
usual  is  to  enlist  the  services  of  one  or  more  of  the  banking 
houses,  trust  companies,  investment  companies  or  firms  making 
a  specialty  of  dealing  in  such  securities.  In  the  case  of  a 
private  corporation  the  officers  are  required  to 
Bo°nd  ifsue  make  a  full  and  explicit  statement  of  its  affairs, 

its  assets  and  liabilities,  its  earnings  past,  present 
and  prospective,  the  amount  of  the  proposed  bond  issue,  an 
exact  description  of  the  property  to  be  covered  by  the  mort- 
gage, and  any  other  facts  which  may  be  relevant  or  which  the 
dealers  may  require.    If  the  showing  appears  favorable  the  appli- 


824  BONDS. 

cant  is  informed  that  if  upon  thorough  investigation  the  facts 
prove  to  be  as  stated  and  everything  is  found  satisfactory  the 
bonds  will  be  negotiated.  The  bond  dealers  then  detail  their 
own  representatives  or  agents  to  make  the  investigation,  which 
is  made  in  the  most  thorough  and  careful  manner,  and  includes 
a  searching  inquiry  into  the  character  and  standing  of  the  offi- 
cers and  directors  of  the  company  making  the  application,  its 
credit  and  business  connections.  Even  when  these  are  well 
known  it  is  usual  to  revise  previous  information  and  make  sure 
that  it  is  in  all  respects  up  to  date.  The  expense  of  the  investiga- 
tion falls  upon  the  applicant,  which  may  be  required  to  make  a 
deposit  in  advance,  of  a  sum  estimated  as  sufficient  to  meet  the 
cost.  Appraisers  are  employed  to  estimate  the  value  of  the 
property,  and  expert  accountants  are  set  to  work  to  examine  the 
company's  books.  In  short,  every  available  means  is  used  to  as- 
certain its  true  condition.  The  dealers  also  employ  special  counsel 
to  report  upon  the  legal  status  of  the  applicant,  whether  it  is 
conducting  its  business  clearly  within  the  limits  of  its  charter, 
whether  it  holds  indefeasible  title  to  its  property,  etc.,  and  to 
see  that  all  the  formalities  required  by  law  are  complied  with 
when  the  bonds  are  issued.  The  result  of  all  these  investigations 
being  found  satisfactory,  the  next  step  is  the  execution  of  the 
mortgage,  which  is  usually  made  in  the  form  of  a  deed  of  trust  to 
some  trust  company.  Then  the  bonds  are  issued  and  may  be 
offered  for  sale.  Sometimes  the  dealers  sell  them  on  commission, 
and  sometimes  they  buy  them  outright.  In  the  latter  case,  if 
the  issue  is  a  large  one,  they  may  form  a  syndicate,  or  special 
partnership  arrangement  by  which  several  dealers  contribute  the 
necessary  capital  and  share  in  the  profits  of  the  transaction. 
Individual  purchasers  of  bonds  run  less  risk  in  buying  those  that 
are  thus  placed  on  the  market  by  some  house  of  established 
reputation,  because  as  the  company  or  firm  that  finances  the 
issue  usually  invests  its  own  or  borrowed  capital  in  the  bonds 
until  they  can  be  sold,  they  can  rely  upon  all  the  precautions 


FORECLOSURE.  Z26 

mentioned  having  been  taken  by  the  dealers  for  their  own  pro- 
tection. 

It  is  customary  to  include  in  the  deed  of  trust  securing  a 
bond  issue  a  clause  providing  that  if  the  interest  is  not  paid 
promptly  as  it  matures,  the  entire  amount  of  principal  and  inter- 
est may,  at  the  option  of  the  bondholders,  after  default  has 
continued  for  a  certain  number  of  days,  "become  immediately 
due  and  payable."  To  prevent  one  or  two  holders  of  small  lots 
of  bonds  exercising  such  option  in  derogation  of  the  interest  of 
the  holders  of  a  majority  of  the  issue,  holders  of  some  specified 
proportion  of  the  issue  are  usually  required,  under  the  provisions 
of  the  trust  deed,  to  unite  in  requesting  the  trustee  to  institute 

foreclosure  proceedings  before  such  action  is  be- 
Poreciosure  gun.    Forcclosurc  having  been  decided  upon,  the 

trust  company  files  a  bill  in  the  proper  court,  al- 
leging the  default  and  praying  that  it  be  allowed  to  sell  the 
pledged  property  in  satisfaction  of  the  debt.  In  the  majority  of 
cases  the  bondholders  file  a  bill  at  the  same  time,  asking  that  a 
receiver  be  appointed  to  take  charge  of  the  affairs  of  the  company 
and  conserve  its  assets  for  the  benefit  of  all  concerned.  Not  in- 
frequently such  action  is  taken  by  the  stockholders  before  the 
bondholders  have  had  time  to  act.  If  there  is  opposition,  the 
court  as  a  rule  refers  the  case  to  a  master  in  chancery,  who,  as 
an  officer  of  the  court,  takes  testimony  and  makes  a  report  to 
the  court,  whereupon,  if  the  report  sustains  the  allegations  in  the 
bill,  a  receiver  is  appointed. 

The  receiver  is  also  an  officer  of  the  court  and  makes  reports 
thereto  as  often  as  may  be  required.  Should  the  foreclosure 
proceed  to  a  sale  and  all  of  the  property  of  the  company  be 
swept  away  his  functions  thereupon  cease.  It  often  happens, 
however,  in  the  case  of  railroads  or  other  large  corporations, 
that  the  bondholders  do  not  wish  to  bid  in  the  property  at  the 
sale  and  assume  the  conduct  of  the  business,  nor  do  they  wish 
to  run  the  risk  that  no  other  bid  will  be  sufficient  to  pay  the 


826  BONDS. 

debt.  And  it  may  also  be  the  case  that  holdings  of  bonds  and 
stocks  are  such  that  the  interests  of  the  respective  owners  are 
complicated.  Furthermore  it  may  appear  possi- 
Reorganization  blc  to  couscrve  the  interest  of  all  concerned,  stock- 
holders as  well  as  bondholders,  by  postponing 
the  foreclosure  sale,  which  lies  within  the  discretion  of  the  bond- 
holders, and  endeavoring  to  effect  a  reorganization  of  the  com- 
pany upon  a  basis  which  will  enable  it  to  continue  its  business 
and  give  both  the  bondholders  and  the  stockholders  new  and 
marketable  securities  in  place  of  those  previously  held. 

Reorganizations  are  customarily  effected  through  the  medium 
of  committees  composed  of  bankers  or  others  skilled  in  finance, 
who  represent  the  various  interests  and  endeavor  to  formulate  a 
plan  which  shall  be  acceptable  to  all.  The  first  task  of  a  reor- 
ganization committee  is  to  get  authority  from  the  bondholders  and 
stockholders  to  represent  them,  which  is  no  small  undertaking 
in  the  case  of  a  corporation  the  bonds  and  stocks  of  which  are 
widely  scattered,  in  Europe  it  may  be  as  well  as  in  this  country. 

Although  the  procedure  is  called  reorganization,  the  cus- 
tomary method  is  to  form  a  new  company  which  bids  in  the 
property  of  the  old  organization  at  the  foreclosure  sale;  and  then 
issues  its  own  bonds  and  stocks  against  the  same  and  such  new 
capital  as  may  have  been  provided.  In  this  way  the  interest  of 
stockholders  and  bondholders  who  do  not  participate  in  the  reor- 
ganization is  eliminated.  Non-participating  bondholders  get  only 
such  percentage  of  the  proceeds  of  the  sale  as  their  bonds  bear  to 
the  total  issue,  and  as  there  are  very  likely  no  other  bidders  aside 
from  the  reorganized  company  it  is  usually  enabled  to  make  a 
low  bid.  Non-participating  stockholders  of  course  get  nothing. 
Sometimes,  however,  when  circumstances  appear  to  justify  it, 
and  their  holdings  are  small,  non-participants  are  permitted  to 
join  the  new  organization  after  the  sale  on  payment  of  a  sum 
exacted  as  a  ''penalty." 

Many  reorganizations  of  American  railroads  are  the  conse- 


REORGANIZATION.  827 

quence  of  the  vicious  system  of  financing  employed  at  the  time 
they  were  constructed.  Too  often  the  bond  issue  was  made 
large  enough  to  pay  the  entire  cost  of  construction  and  equip- 
ment and  also  a  handsome  profit  for  the  promoters,  the  stock 
being  either  retained  by  the  promoters  or  given  as  a  bonus  to 
help  the  sale  of  the  bonds  which  could  not  otherwise  be  mar- 
keted. If  the  road  could  be  made  to  earn  the  interest  on  the 
excessive  issue,  well  and  good;  if  not,  then  disaster  must  follow, 
sooner  or  later. 


SECURITIES  AND  INVESTMENTS. 


CHAPTER  XXXV. 

BONDS,    STOCKS    AND    MORTGAGES. 

GOVERNMENTS;    STATE    AND    MUNICIPAL;    KINDS    OP    MORTGAGE 

SECURITIES. 

By  the  term  securities  we  usually  mean  stocks  or  bonds  of 
corporations,  either  public  or  private,  and  mortgages  upon  real 
estate.  These  are  evidences  of  property,  and  in  the  eyes  of  the 
law  are  regarded  as  personal  property.  Being  negotiable  or  as- 
signable by  mere  delivery,  and  readily  convertible,  they  are 
extensively  used  as  collateral  security  for  loans  and  other  con- 
tracts, and  have  gradually  taken  the  name  of  se- 
Definition  curitics.    The  value  of  any  security  depends  upon 

the  character  of  the  property  which  it  represents, 
and  the  rate  of  income  which  it  is  reasonably  certain  to  produce. 
The  more  secure  the  investment  is  regarded,  the  higher  its 
market  price  is  apt  to  be,  and  therefore  the  lower  the  rate  of 
income  which  it  yields.     Investors  who  are  willing  to  assume 
risks  are  comparatively  few,  and  those  who  wish  to  be  certain 
of  the  return  of  their  capital  are  satisfied  with  smaller  dividends. 
United  States  government  bonds  may  be  classed  as  the  high- 
est order  of  securities  before  the  public.     Our  faith  in  the  in- 
tegrity and  stability  of  the  government  is  such  that  we  do  not 
hesitate  to  invest  in  its  bonds  at  very  low  rates  of  interest.* 
During  the  great  Civil  War  our  government  issued 
Governments       large  amouuts  of  bouds  for  war  purposes,  but  the 
amount  has  been  gradually  reduced,  by  payment 

♦The  lowest  rate  which  any  of  the  government  bond  issues  draw  is  2 
per  cent, 


STATE  OBLIGATIONS.  9SSQ 

of  the  public  debt,  and  the  rate  of  interest  lowered,  while  the 
price  has  advanced  until  they  are  no  longer  a  profitable  class 
of  investments.  The  national  banks  now  absorb  a  large  portion 
of  our  government  bonds  in  compliance  with  the  National  Bank- 
ing Law.  The  remainder  of  them  are  mostly  taken  as  invest- 
ments for  trust  and  other  funds  where  safety  and  facility  of  con- 
version are  greater  considerations  than  a  high  rate  of  interest. 
They  are  considered  absolutely  safe  and  always  marketable. 

State  and  municipal  bonds  are  in  some  instances  high  class 
securities,  and  in  others  of  a  very  low  grade.  Unfortunately 
many  of  the  states  have  not  preserved  their  credit  in  financial 
markets.  Swayed  by  popular  impulse,  they  have,  in  times  of 
stress  been  led  into  the  suicidal  error  of  repudiating  their  just 
obligations.  A  lack  of  patriotism  and  state  pride  combined  with 
a  knowledge  of  the  fact  that  a  "state  cannot  be  sued"  has  in 
several  instances  resulted  in  dishonest  legislation.  Even  where 
bonds  have  been  issued  with  an  honest  purpose,  there  have  come 
Unreliability  political  disturbances  leading  to  a  revulsion  of 
of  state  sentiment,  or  affording  an  opportunity  to  dema- 

Obhgations  gogues  to  assail  public  creditors  and  perhaps  se- 

cure a  majority  of  votes  against  the  payment  of  just  debts.*  For 
these  reasons,  state  securities  are  not  usually  regarded  favorably 
by  investors. 

"Whoever  buys  the  paper  of  a  state  should  do  so  with  the 
distinct  understanding  that  he  has  nothing  but  its  honor  to 
rely  upon,  unless  the  commercial  relations  of  its  citizens  should 
be  of  such  a  character  as  to  make  its  financial  credit  important 
to  their  business  interests.  There  is  for  that  reason  little  like- 
lihood of  such  states  as  New  York  and  Massachusetts  ever  repu- 
diating their  obligations."  These  states  contain  the  two  great- 
est money  centers  of  the  country,  and  being  the  chief  lenders, 
they  could  not  afford  to  set  an  example  of  repudiation  to  other 


•Twelve  states  of  the  union  have  broken  faith  with  their  creditors  at 
different  times,  and  either  openly  repudiated  or  ignored  their  outstanding 
Obligations  in  whole  or  in  part. 


880  SECURITIES  AND  INVESTMENTS. 

states.  What  has  been  said  in  regard  to  the  uncertain  value  of 
state  securities  applies  to  some  extent  to  county,  town  and 
municipal  obligations.  The  same  people  compose  the  state  and 
the  local  organization,  and  the  same  moral  sentiments  exist  con- 
cerning both  obligations.  There  is  this  important  distinction, 
however,  that  municipal  obligations  can  be  enforced  in  the  courts, 

provided  they  are  properly  created.  There  are 
Securities  many  points  which  go  to  determine  the  value  and 

reliability  of  municipal  securities.  The  first  of 
these  is  the  legality  of  issue.  If  the  bonds  have  been  in  litiga- 
tion their  legal  status  has  probably  been  fixed  by  the  courts, 
but  unless  this  is  the  case,  their  legality  should  be  investigated  by 
a  competent  lawyer.  Besides  the  legal  points  involved  and  the 
disposition  of  the  municipality  to  pay,  there  is  also  the  question 
of  its  ability  to  meet  its  obligations.  The  laws  in  many  of  the 
states  limit  the  power  of  municipalities  to  issue  bonds  to  a 
small  percentage  of  the  taxable  property,*  thus  aiming  to  pro- 
tect both  creditors  and  taxpayers,  but  since  the  bonds  must  be 
paid  out  of  the  taxes,  and  taxes  are  dependent  upon  the  value 
of  property,  it  follows  that  the  payment  of  a  bond  issue  is  con- 
tingent upon  the  general  prosperity  of  the  town  or  business 
community.  As  our  cities  and  other  municipalities  grow  in 
wealth  and  population,  they  become  better  able  to  meet  outstand- 
ing obligations,  especially  where  bond  issues  have  not  kept  pace 
with  population,  and  hence  the  tendency  of  this  class  of  securi- 
ties is  to  gradually  improve  in  the  estimation  of  investors.  One 
disadvantage  in  the  case  of  bonds  issued  by  small  municipalities 
is  that  not  being  widely  known  the  market  for  them  is  a  limited 
one.  This  makes  them  to  some  extent  undesirable  investments, 
except  for  people  who  do  not  regard  ready  negotiability  as  im- 
portant. With  such  investors  they  are  favorite  securities.  The 
bonds  of  some  of  the  larger  cities  are  only  slightly  less  esteemed 
than  those  issued  by  the  general  government. 


♦In  Illinois  the  limit  is  5  per  cent. 


LOCAL  SECURITIES.  381 

Leaving  now  the  consideration  of  the  securities  of  public 
corporations,  we  come  to  that  larger  class  of  mortgage  securities 
based  upon  private  property,  either  corporate  or  individual. 
Mortgage  securities  may  be  divided  into  two  general  classes, 
one  of  which  is  based  upon  the  actual  value  of  the  property 
mortgaged  and  the  other  upon  the  earning  power  of  the  property. 
Thus  when  a  man  loans  money  and  takes  as  security  a  mortgage 
upon  the  house  and  land  of  the  borrower,  he  estimates  the  actual 
value  of  the  house  and  land.  He  does  not  wish  to 
slcuritfe*s  become  in  effect  a  partner  with  the  mortgagor  by 

making  the  repayment  of  the  loan  dependent 
wholly  upon  the  borrower's  success  in  business.  He  wishes  the 
security  to  repay  the  loan  in  case  the  borrower  fails  to  pay; 
hence  if  he  is  prudent  he  loans  but  one-half  or  two-thirds  of 
the  actual  value  of  the  security,  so  as  to  leave  abundant  margin 
for  shrinkage  in  case  of  forced  sale.  But  suppose  he  loans  to  a 
corporation — say  a  railroad  company — by  purchasing  its  bonds, 
he  depends  for  the  security  of  his  money  not  upon  the  property 
as  such,  consisting  of  road-bed,  depot  buildings,  etc.,  but  upon 
the  business  success  of  the  road.  If  the  road  does  a  profitable 
business  the  bonds  are  safe,  otherwise  not.  There  is  not  a  rail- 
road in  the  United  States  that  would  sell  for  its  bonded  in- 
debtedness in  case  its  business  was  to  cease.  The  rails  and  ties 
would  be  worthless  except  as  old  iron  and  wood,  and  the  right 
of  way  could  be  sold  to  neighboring  farmers  at  only  a  small 
price.  Considered  simply  as  real  estate,  the  entire  property 
of  a  railroad  company  would  be  worth  but  a  small  fraction  of  its 
bonded  indebtedness.  The  value  of  the  bonds,  then,  is  sustained 
by  the  profits  or  income  from  the  property.  From  this  another 
reason  is  apparent  why  when  a  railway  company  becomes  finan- 
cially embarrassed  the  courts  appoint  a  receiver  to  take  charge 
of  and  run  the  road,  pending  a  settlement  with  the  creditors. 
To  stop  the  operation  of  the  road  would  be  to  vastly  depreciate 
if  not  ruin  and  destroy  the  property.     The  investor,  therefore, 


332  SECURITIES  AND  INVESTMENTS. 

who  contemplates  the  purchase  of  railway  securities  should  con- 
sider well  the  present  and  future  earnings  of  the  corporation. 
If  its  earning  capacity  for  any  reason  becomes  seriously  im- 
paired, nothing  can  save  the  bondholders  from  loss.  And  yet 
railroads  are  such  a  necessity  to  our  civilized  life,  and  their 
traffic  so  dependent  upon  our  industrial  system  that  their  income 
can  be  made  the  basis  for  borrowing  money  as  safely  as  can  a 
dwelling-house. 

It  is  apparent  from  the  foregoing  that  the  desirability  of 
railroad  bonds  as  an  investment  is  dependent  upon  two  con- 
ditions, viz.:  With  old,  established  roads  these  two  factors  in 
the  problem  can  be  easily  ascertained,  but  with  new  roads  the 
question  of  earnings  can  only  be  surmised,  and  if  the  manage- 
ment of  the  company  is  defective,  or  the  earnings 
Otocr  Bonds  ^^^  Overestimated  the  result  is  likely  to  be  a  re- 
ceivership and  reorganization,  with  all  of  their  dis- 
astrous consequences  to  investors.  In  the  case  of  street  railroads, 
telephone  systems,  water  and  gas  works,  the  franchise  is  usually 
a  valuable  asset  which  will  support  a  considerable  bond  issue, 
especially  when  it  has  many  years  to  run.  On  the  other  hand, 
the  danger  of  competition  is  always  a  menace  to  the  income 
of  a  corporation  unless  it  has  an  absolute  monopoly.  Thus  gas 
and  electric  companies  are  competitors  and  the  profits  from  each 
may  be  correspondingly  reduced. 

The  value  of  the  security  afforded  by  bonds  of  ordinary  com- 
mercial and  manufacturing  corporations  must  be  estimated 
wholly  upon  the  merits  of  each  individual  case.  Each  interest 
must  be  investigated  in  all  its  bearings  in  order  to  reach  a 
wise  decision,  while  competition,  management  and  public  re- 
quirements are  important  factors  which  should  be  carefully 
considered  by  the  investor  before  placing  his  money. 

There  are  many  uncertainties  that  threaten  stocks  which  do 
not  appertain  to  bonds.  The  latter  are  secured  upon  the  prop- 
erty or  earnings  of  the  corporation,  and  are  fixed  and  determined, 


STOCKS.  333 

but  the  value  of  stocks  rests  largely  upon  the  earning  power  and 
the  management  of  the  corporation  and  also  the  future  condi- 
tions under  which  the  company  may  conduct  its 
stocks  business.     The  investor  in  stocks  should,  there- 

fore, anticipate  the  future  and  weigh  the  proba- 
bilities of  business  success.  A  business  which  is  successful 
to-day  may  be  run  at  a  loss  next  year  or  compelled  to  close  down 
entirely.  Competition  is  constantly  shifting  and  must  be  met 
in  a  variety  of  forms.  New  inventions  and  labor  saving  processes 
may  give  a  temporary  advantage  to  those  who  discover  or  secure 
them  first,  and  reduce  the  dividends  of  companies  which  were 
prosperous  before.  The  telephone  competes  with  the  telegraph, 
and  the  trolley  car  cuts  into  the  suburban  traffic  of  steam  rail- 
roads. Lines  of  business  which  yield  large  returns  especially  in- 
vite competition,  and  as  a  result  the  business  may  become  over- 
done and  profits  entirely  disappear.  The  stock  of  companies 
formed  to  use  or  promote  new  and  useful  inventions  is  frequently 
the  most  profitable  and  where  a  monopoly  is  thus  secured  for  a 
time,  large  fortunes  have  been  made.  Late  investors  in  such 
stock,  however,  are  very  likely  not  to  fare  so  well.  Every  hour 
shortens  the  life  of  a  trade  monopoly.  Among  the  safest  stocks 
are  those  of  well  managed  banks  and  insurance  companies.  The 
states  exercise  a  supervision  over  these  companies,  and  their 
shares  can  generally  be  relied  upon  as  representing  actual  cash 
investments,  especially  in  those  states  where  the  laws  are  strict 
concerning  such  corporations  and  the  general  administration  of 
law  is  considered  good.  In  the  case  of  banks,  however,  the 
stockholder  often  incurs  the  risk  of  liability  to  creditors  to  the 
extent  of  the  face  value  of  his  stock,  in  the  event  of  the  bank 
becoming  insolvent. 

Mortgages  on  real  estate  are  considered  a  desirable  class  of 
securities,  especially  when  the  mortgage  represents  not  more  than 
one-half  the  actual  market  value  of  the  property,  and  where  the 
property  is  located  in  a  prosperous  and  growing  community. 


334  SECURITIES  AND  INVESTMENTS. 

Many  insurance  companies  and  savings  banks  decline  to  loan 
upon  wooden  houses,  confining  their  investments  to  securities 
upon  either  stone  or  brick  improvements  for  the 
Mort^g^^s*'  reason  that  these  are  less  liable  to  deteriorate  by 

the  ravages  of  time  or  to  be  destroyed  by  fire. 
Other  investors  prefer  mortgages  upon  residence  property  upon 
the  theory  that  a  man  will  protect  his  home  from  foreclosure 
when  he  would  not  other  property.  Unless  there  is  a  decided 
advance  in  the  value  of  land  in  the  vicinity  of  the  property 
mortgaged,  the  mortgagor  should  aim  to  reduce  the  amount 
of  the  mortgage  at  maturity  by  making  a  part  payment  at  least, 
since  property  naturally  deteriorates  with  time,  and  at  the  end 
of  three  or  five  years  the  property  may  not  be  as  good  security 
for  the  debt  as  it  was  originally. 

Eeal  estate  mortgage  notes  are  usually  made  payable  to  the 
order  of  the  maker  and  are  then  endorsed  by  him  in  blank. 
This  makes  the  security  transferable  by  mere  delivery,  and  hence 
the  holder  of  a  mortgage  may  sell  it,  and  an  investor  purchase  it, 
the  same  as  any  other  chattel.  The  buyer  must  of  course,  exer- 
cise good  judgment  and  proper  care  to  see  that  the  security  is 
sufficient  and  the  character  of  the  property  satisfactory  before 
investing.  By  trusting  to  representations  of  brokers  in  regard 
to  these  vital  points,  instead  of  making  a  personal  investigation, 
investors  have  been  known  to  find  later  on  that  their  money 
was  paid  for  a  comparatively  worthless  security. 

As  the  country  becomes  more  densely  populated,  and  the  un- 
occupied lands  of  the  West  are  taken  up,  the  farm  lands  in  the 
great  Mississippi  Yalley  become  more  valuable  and  prices  tend 
to  advance.  Mortgages  upon  good,  productive  farms  in  the 
central  west  are  therefore  growing  in  popularity 
Mortgages  ^^^  morc  and  more  absorbing  the  capital  of  in- 

vestors. Paper  resting  upon  landed  security  in 
the  newer  and  rapidly  developing  sections  of  the  West,  where 
farming  is  uniformly  successful  is  almost  sure  to  be  good.    But 


MORTGAGES.  886 

like  city  mortgages  farm  securities  must  be  carefully  investigated 
or  disaster  may  result.  There  have  been  mortgage  companies 
located  in  western  cities  whose  business  consisted  in  making 
loans  on  farms  and  selling  the  securities  to  eastern  investors.  In 
some  instances  these  companies  guaranteed  the  paper.  But 
as  the  loan  company  used  the  same  money  over  and  over  again 
to  make  the  loans,  it  is  apparent  that  their  guaranties  would 
soon  exceed  the  amount  of  their  capital  and  hence  become  prac- 
tically worthless.  One  objection  to  farm  loans  is  the  uncertainty 
of  payment  of  interest  in  case  of  a  crop  failure.  What  an  in- 
vestor wants  is  not  only  safety  of  principal,  but  regularity  as  to 
payment  of  interest.  A  locality  where  there  is  a  diversity  of 
crops  is  preferable  for  desirable  mortgages,  since  in  case  there 
should  be  a  failure  of  one  crop,  the  mortgagor  may  yet  be  able 
to  pay  his  interest  from  other  products.  Where  a  single  crop  is 
depended  upon,  or  the  land  is  situated  so  that  it  is  subject  to 
overflow,  resulting  in  an  occasional  total  failure  of  crop,  the 
mortgagor  may  be  compelled  to  default  in  the  interest  perhaps 
for  a  year. 

Then  again,  investors  would  do  well  always  to  consider  the 
disposition  and  ability  of  debtors  to  pay.    No  matter  how  good 
the  security,  the  mortgagor's  credit  has  an  important  bearing 
upon  the  value  of  his  paper  as  security  for  money 
to  p'aT*'°"  loaned  or  invested.    Where  public  officials  repudi- 

ate their  just  obligations  and  the  laws  are  framed 
in  the  interest  of  the  debtor  class,  investors  may  well  beware. 
As  previously  noticed,  several  of  our  states  have  openly  violated 
their  obligations,  and  hostile  laws  have  been  passed  against 
capital  by  both  state  and  municipal  governments.  It  can  hardly 
be  expected  that  private  citizens  will  prove  to  be  shining  ex- 
amples of  integrity  when  those  in  authority  above  them  are 
thus  derelict.    Investors,  therefore,  aim  to  avoid  such  localities. 


COMMERCIAL  CREDITS. 


CHAPTER  XXXVI. 

OUR   CREDIT   SYSTEM. 
ASSETS;   LOSSES;    LIMIT   OF   CREDIT;    MACHINERY   OP    CREDIT. 

The  wonderful  commercial  progress  and  development  of  this 
country  during  the  past  century  has  astonished  the  old  world  and 
amazed  even  ourselves.  In  looking  about  for  the  moving  causes 
which  have  produced  this  great  result,  we  must  ascribe  a  large 
part  to  our  credit  system,  extending  as  it  does,  to  every  nook  and 
comer  of  the  land.  In  no  country  in  the  world  is  credit  so  easily 
obtained  and  so  extensively  used  as  in  the  United  States.  Capital 
goes  out  freely  and  willingly  and  takes  its  chances  in  all  manner 
of  enterprises,  so  long  as  they  offer  fair  prospects  of  returns  on 
the  investment.  Thus  the  American  people  are  educated  in  the 
use  of  credit,  and  have  learned  to  depend  upon  it,  until  it  has 

become  closely  interwoven  with  our  commercial 
System  *  systcm.     In  European  countries  credit  is  more  or 

less  restricted.  In  Italy  and  Spain  little  credit  is 
extended,  and  accordingly  we  see  a  languishing  commerce.  In 
Western  Europe  it  is  more  widely  used  and  commerce  shows 
corresponding  vigor  and  activity.  The  use  of  credit  is  not  alone 
confined  to  the  purchase  or  sale  of  goods  on  time  or  borrowing 
or  lending  money,  but  extends  to  innumerable  acts  of  trust  and 
confidence  by  which  the  machinery  of  the  business  world  is 
kept  in  successful  operation.  A  borrows  money  at  his  bank 
and  the  amount  is  placed  to  his  credit.  He  owes  B  and  gives  a 
check  in  payment.  The  check  is  deposited  in  B's  bank  and 
passes  through  the  clearing  house,  where  it  is  offset  by  some 
other  check  of  like  amount,  and  as  a  result  the  credit  is  trans- 

336 


CREDITS.  337 

ferred  from  the  account  of  A  to  that  of  B.  No  money  or  actual 
cash  is  handled  in  the  transaction,  but  merely  a  transfer  of 
credit.  It  is  one  incident  in  our  credit  system.  Our  clearing 
houses,  stock  exchanges  and  produce  markets  are  all  conducted 
on  the  same  principle — one  debt  being  set  off  against  another, 
and  a  small  percentage  of  the  transaction  actually  liquidated  in 
cash.  All  of  our  large  corporations  and  their  gigantic  oper- 
ations of  both  a  public  and  private  character  are  possible  only 
through  the  medium  of  our  credit  system.  Our  whole  com- 
mercial fabric  rests  upon  it. 

Since  our  credit  system  forms  such  an  important  factor  in 
the  problem  of  business  management,  it  becomes  necessary  to 
understand  and  carefully  use  it.  Losses  are  imperative  under  a 
credit  system,  and  the  aim  must  be  to  more  than  recoup  for  the 
loss  by  an  increased  volume  of  business.  Losses  in  business 
are  largely  the  result  of  carelessness,  inexperience  and  a  lack 
of  proper  system  and  discipline  on  the  part  of  business  men,  or 
a  lack  of  knowledge  and  judgment  in  giving  credit. 
iii°evftebie  ^^  experienced  credit  man  is  responsible  for  the 

assertion  that  "we  have  only  to  take  the  average 
business  house  for  the  last  twenty  years  and  figure  up  the 
losses  sustained  by  it  and  compare  the  sum  total,  plus  com- 
pound interest,  with  its  present  financial  status,  and  we  shall 
find  that  it  has  lost  more  than  the  capital  accumulated  during 
the  period." 

A  lack  of  a  prompt  and  effective  credit  department  where  col- 
lections are  looked  after  carefully  and  thoroughly,  is  sure  to  re- 
sult in  a  stream  of  losses  to  the  house,  with  possible  failure  in 
the  end.  So  extensive  has  the  use  of  credit  become  that  large 
commercial  houses  have  legal  departments  in  connection  with 
their  credit  departments  kept  busy  with  the  collection  of  ac- 
counts of  delinquent  customers.  Often  the  most  energetic  action 
is  necessary  to  obtain  assets  in  advance  of  the  sheriff  or  assignee. 

From  Dun's  Eeview,  New  York,  we  have  the  following: 


\  COMMERCIAL  CREDITS. 

TABLE  OF  FAILURES  IN  THE  UNITED  STATES, 
1891  TO  1901. 


Year. 
1892... 

Number  of 

Concerns 

in  Business. 

1,172,705 

Number 

of 
Failures. 

10,344 

Amount 

of 

Liabilities. 

114,044,167 

Average 
Liabili- 
ties. 
11,025 

Proportion 

of 
Failures. 

1  in  113 

1893... 

1,193,113 

15,242 

346,779,889 

22,751 

1  in     78 

1894... 

1,114,174 

13,885 

172,992,856 

12,458 

1  in    80 

1895... 

1,209,282 

13,197 

173,196,060 

13,124 

1  in    92 

1896... 

1,151,579 

15,088 

226,096,834 

14,992 

1  in    76 

1897... 

1,058,521 

13,351 

154,332,071 

11,559 

1  in    79 

1898... 

1,105,830 

12,186 

130,662,899 

10,722 

1  in    90 

1899... 

1,147,595 

9,337 

90,879,889 

9,733 

1  in  123 

1900... 

1,174,300 

10,774 

138,495,673 

12,854 

1  in  108 

1901... 

1,219,242 
1  1,154,634 

11,002 
12,440 

113,092,376 
166,057,271 

10,279 
12,949 

1  in  111 

Average 

1  in    95 

The  period  of  time  covered  by  this  table  includes  the  year  of 
panic,  1893,  and  the  depression  which  followed,  as  well  as  the 
years  of  prosperity  at  the  latter  part  of  the  table,  and  may  thus 
be  taken  as  fairly  representative  of  the  average  working  of  our 
credit  system.  Out  of  1,154,634  mercantile  and  manufacturing 
firms,  corporations  and  individuals  doing  business  during  the 
period,  as  shown  by  the  table,  12,440  failed,  or  one  in  every 
ninety-five.  Innumerable  petty  failures  consisting  of  those 
whose  capital  is  too  small  for  a  rating,  are  not  included  in  these 
figures.  The  average  total  liabilities  of  the  concerns  failing  are, 
in  round  numbers,  $166,000,000.  This  is  not  a  total  loss,  as  a 
portion  will  eventually  be  paid.  We  may  safely  assume  that 
not  more  than  thirty  per  cent,  will  be  paid,  leaving  a  net  loss 
to  creditors  of  about  $116,000,000  in  each  year.     This  makes 

no  account  of  the  injury  to  trade  consequent  upon 
AsMte^^^°^        having  such  a  large  amount  of  assets  tied  up  in 

litigation  or  pending  settlement.  Since  thirty  per 
cent,  of  the  liabilities  are  realized  in  cash,  after  the  expenses 
of  conversion  of  the  assets,  shrinkage,  etc.,  it  follows  that  the 


LOSSES.  339 

assets  of  the  firms  whose  failures  amount  to  $166,000,000, 
as  above  stated,  probably  amounted  to  one-half  or  two-thirds  the 
liabilities,  or,  say,  eighty  to  one  hundred  millions.  The  per- 
centage of  loss  can  only  be  ascertained  by  knowing  the  amount 
of  business  done.  Business  houses  usually  compute  the  rate  of 
loss  upon  the  volume  of  business  transacted  and  not  upon  the 
amount  of  their  capital,  and  since  the  capital  of  a  concern  is 
usually  turned  over  several  times  in  a  year,  the  volume  of  busi- 
ness may  be  four  or  five  times  the  capital  invested.  Without 
knowing  the  volume  of  business  done,  or  the  capital  invested  in 
mercantile  and  manufacturing  enterprises,  it  is,  therefore,  im- 
possible to  arrive  at  the  percentage  of  losses  under  our  credit 
system,  but  it  is  apparent  that,  beneficial  as  the  system  is,  we 
are  doing  a  large  amount  of  business  not  only  for  no  profit,  but 
at  a  loss  of  capital.  It  is  true  that  within  certain  limits  the 
merchant  adds  his  percentage  of  losses  to  his  selling  prices, 
and  thus  the  customer  who  pays  makes  good  the  loss  occasioned 
by  those  who  do  not  pay,  but  competition  is  constantly  tending 
to  keep  prices  uniform,  and  the  merchant  who  makes  the  least 
of  bad  debts  comes  the  nearest  to  a  successful  career,  provided 
the  volume  of  his  business  is  not  restricted  by  too  much  caution. 
To  what  extent  credit  may  be  extended  to  a  buyer  in  any 
given  case  is  a  problem  depending  upon  a  combination  of 
factors.  Outside  of  the  capital  invested,  assets  and  liabilities, 
is  the  character  of  the  individual,  the  conditions  surrounding 
his  enterprise  which  make  it  a  success  or  failure,  his  experience, 
etc.,  all  of  which  must  be  carefully  weighed  by  the  credit  man 
before  arriving  at  a  decision.  Mr.  P.  R.  Earling,  in  his  book 
entitled  "Whom  to  Trust,"  says:    "On  the  supposition,  justified 

by  experience,  that  the  assets  of  a  mercantile  firm, 
Limit  of  Credit     in  the  cvcnt  of  forcclosure  or  assignee's  sale,  do 

not  bring  over  65  per  cent.,  the  limit  of  credit,  to 
insure  us  dollar  for  dollar,  must  be  fixed  at  65  per  cent,  of  the 
inventory  of  the  assets.    In  the  case  we  have  assumed,  $10,000 


840  COMMERCIAL  CREDITS. 

assets  would  pay  liabilities  of  $6,500,  and  this  amount  must  be 
established  as  the  limit,  and  in  all  eases  this  relative  proportion 
should  be  maintained/' 

The  nature  of  the  assets  should  be  considered,  however,  as 
this  may  vary  the  amount  of  shrinkage  greatly.  If  the  assets 
consist  largely  of  staple  merchandise  and  secured  notes  or  ac- 
counts, the  shrinkage  may  be  comparatively  small,  especially  if 
the  market  for  such  goods  or  products  is  an  advancing  one. 
On  the  other  hand,  old  goods  and  stale  accounts  are  subject  to  a 
fearful  shrinkage  when  an  attempt  is  made  to  convert  them  into 
cash. 

Written  and  signed  statements  of  assets  and  liabilities  are 
now  exacted  of  customers  applying  for  any  considerable  amount 
of  credit,  by  wholesale  houses  and  banks,  thus  placing  the 
facts  in  such  form  that  in  cases  of  misrepresentation  the  person 
signing  the  statement  may  be  punished  for  fraud  in  "obtaining 
goods  by  false  pretenses."  Buyers  may  intend  to  be  honest  in 
their  statements,  but  are  frequently  optimistic  and  inclined  to 
overestimate  their  resources  and  ability  to  pay.  The  written 
statement  tends  to  reduce  the  problem  of  "facts  and  figures," 
and  dispel  illusions.  It  is  also  customary  to  re- 
statements quest  references  in  order  to  ascertain  how  a  firm 
stands  in  the  estimation  of  others,  but  these  are 
of  much  or  little  value,  according  to  the  motive  of  the  writers. 
A  jealous  desire  to  injure  a  rival  may  cause  an  unfavorable 
report,  or  a  disinclination  to  injure  a  friend  may  be  the  motive 
for  a  half  favorable  reply  concerning  an  undesirable  customer. 
Banks  are  constantly  asked  concerning  the  financial  standing  of 
their  customers,  but  it  should  be  remembered  that  a  man  often 
keeps  faith  with  his  banker  when  he  stands  poorly  elsewhere, 
and  thus  the  banker's  opinion  may  not  be  accurate. 

Commercial  agencies  greatly  facilitate  credits  by  furnishing 
information  concerning  the  financial  status  of  business  firms 
and  individuals.     This  information  is  collected  in  a  variety  of 


LIMIT  OF  CREDIT.  341 

ways,  by  special  reporters,  lawyers  and  others,  and  supplied 
confidentially  to  subscribers.  In  this  era  of  extensive  and  varied 
uses  of  the  credit  system,  a  systematic  method  of  collecting 
information  concerning  firms  and  furnishing  it  to  those  who  are 
properly  entitled  to  receive  it,  is  of  immense  advantage.  In 
addition  to  quarterly  and  semi-annually  revised  reference  books 
the  mercantile  agencies  undertake  to  furnish  their 
Age^i'es^'  subscribers  with  special  reports,  consisting  of  de- 

tailed statements  of  facts  concerning  the  financial 
status  of  every  dealer  of  any  consequence  in  the  country.  The 
mercantile  agency  also  takes  cognizance  of  mortgages,  judg- 
ments and  transfers  of  property  upon  the  county  records,  and 
preserves  the  facts  concerning  them  upon  the  agency's  records. 
They  endeavor  to  get  "Signed  Statements"  of  assets  and  liabili- 
ties from  the  debtor  class  whenever  possible,  and  thus  a  mer- 
cantile report,  made  up  from  a  variety  of  sources,  is  of  great 
advantage  to  every  dispenser  of  credit,  especially  as  the  courts 
have  held  that  under  certain  circumstances  a  statement  fur- 
nished a  mercantile  agency  is  as  binding  on  the  maker  as  if 
furnished  a  creditor  direct.  The  reliability  of  these  reports 
cannot  always  be  depended  upon  strictly,  but  the  prosperity 
of  the  companies  engaged  in  that  field  of  research  is  an  evidence 
that  the  public  has  confidence  in  them. 

The  facts  gathered  by  the  mercantile  agencies*  are  not  pub- 
lic property,  but  are  furnished  under  restrictions  to  sub- 
scribers to  the  agency  only.  It  has  been  decided  by  the  courts 
that  the  agencies  are  not  responsible  for  inaccuracies  of  their 
statements,  nor  can  they  be  prosecuted  for  libel  on  account  of 
furnishing  facts  which  may  prove  damaging  to  the  business 
standing  of  a  dealer.  These  institutions  aim  to  verify  all  im- 
portant facts  before  sending  them  out,  and  since  no  malice  can 
be  shown,  in  case  of  error,  there  is  little  room  for  litigation.    The 


♦The  principal  mercantile  agencies  are  R.  G.  Dun  &  Co.  and  Bradstreet's, 
although  there  are  a  number  o£  lesser  importance. 


342  COMMERCIAL  CREDITS. 

commercial  agency  is  ever  on  the  alert  for  every  item  of  informa- 
tion which  would  seriously  affect  in  an  injurious  way,  the  credit 

or  financial  standing  of  a  dealer.  The  recording  of 
Reports'^^°  a  chattel  mortgage,  confession   of    a    judgment, 

sale  or  other  transfer  of  property,  are  noted, 
and  in  the  case  of  an  absconding  debtor  his  whereabouts 
is  frequently  disclosed  by  the  reporter  or  correspondent  of  the 
mercantile  agency. 

In  addition  to  the  mercantile  agencies  we  have  credit  asso- 
ciations in  many  of  the  different  lines  of  trade,  in  which  a  large 
number  of  the  firms  and  dealers  are  banded  together  for  mutual 
protection.  A  bureau  is  created  and  the  information  required 
by  members  obtained  by  a  clerk  employed  by  the  bureau.  The 
main  object  of  these  associations  is  mutual  aid  in  the  matter  of 

credits.  Buyers  who  fail  to  meet  their  bills  are 
Associations         prevented  from  obtaining  credit  from  other  houses, 

by  having  their  past  record  brought  to  the  atten- 
tion of  all  members  of  the  association,  and  thus  by  a  variety  of 
means,  business  firms  aim  to  guard  the  expansion  of  credit,  and 
permit  its  proper  and  conservative  use. 

The  laws  with  reference  to  the  collection  of  debts  in  dif- 
ferent localities  must  also  be  considered  when  extending  credit. 
In  some  states  the  laws  are  framed  in  a  manner  decidedly  favor- 
able to  the  debtor  class.  The  exemptions  are  large  enough  to 
shield  several  thousand  dollars  worth  of  property,  and  the  "laws 

delays"  are  more  than  necessarily  numerous.  Es- 
Laws  ^°"  pecially  in  the  western  frontier  states  where  it  is 

perhaps  intended  to  attract  settlers  by  favorable 
laws,  thus  giving  the  pioneer  an  advantage  to  offset  the  hard- 
ships which  he  must  undergo,  in  opening  up  a  new  region,  do 
we  find  the  laws  most  favorable  to  the  debtor.  In  the  eastern 
and  more  populous  states  the  laws  are  more  equitable  and  judg- 
ment and  execution  can  be  more  quickly  obtained.  Every  suc- 
cessful credit  man  must  be  conversant  to  a  limited  extent,  at 
least,  with  the  laws  of  the  states  in  which  he  does  business. 


CREDIT  ASSOCIATIONS.  348 

In  extending  credit  to  a  co-partnership  some  factors  enter 
into  the  problem  which  do  not  appear  in  the  case  of  a  single 
individual.  In  order  that  a  partnership  ma}'  be  successful  in 
business  it  is  essential  that  the  different  members  of  the  firm 
should  be  harmonious  in  their  ideas  and  actions.  Discord  is 
sure  to  lead  to  trouble  and  probable  failure,  or 
Partnership  dissolutiou.  "A  housc  divided  against  itself  can- 
not stand."  The  credit  of  an  inharmonious  co- 
partnership must  necessarily  be  rated  low,  and  the  credit  man 
must  decide  whether  the  partnership  is  one  which  combines  the 
elements  of  success,  and  whether  the  firm  is  stronger  or  weaker 
than  its  individual  members.  It  is  an  old  adage  in  business  life 
that  one  would  do  well  to  "avoid  unfortunate  men  in  your  busi- 
ness affairs."  If  a  firm  is  composed  of  several  partners  one  of 
whom  has  hitherto  been  unsuccessful  it  diminishes  the  credit  of 
the  firm.  We  may  sympathize  with  "an  unfortunate  man"  but 
hesitate  to  credit  him. 

Corporations  have  their  advantages  and  their  disadvantages. 
One  of  the  latter  is  met  with  in  obtaining  credit.  For  old  and 
well  known  houses  whose  credit  is  established,  to  incorporate 
in  order  to  facilitate  management  of  the  business  or  the  transfer 
of  interests  therein,  is  perfectly  proper  and  wise,  but  in  the  case 
of  new  enterprises,  the  corporation  labors  under 
Corporations  a  decided  disadvantage.  The  partners  of  a  firm  are 
severally  liable  for  all  debts  of  the  firm  to  the 
fullest  extent.  They  are  bound  during  a  lifetime,  or  until  re- 
leased by  the  statute  of  limitations,  to  pay  the  firm  debts,  but 
with  a  corporation,  each  shareholder  is  liable  only  to  the  amount 
of  his  stock.*  Failure  of  the  company  cannot  involve  him  beyond 
this.    It  is  this  feature,  the  non-liability  of  the  individual  mem- 

♦Each  shareholder  is  liable  only  to  the  amount  of  the  par  value  of  his 
stock,  in  most  of  the  states,  and  cannot  be  proceeded  against  for  corporate 
liabilities  except  in  case  the  shares  have  not  been  fully  paid,  In  which 
event  the  unpaid  portion  is  collectible  at  law.  In  Ohio  and  a  few  other 
states  sharehoideii  are  liable  to  twice  the  par  value  of  their  stock. 


344  COMMERCIAL  CREDITS. 

bers  of  the  company,  which  makes  the  credit  rating  of  a  cor- 
poration lower  than  a  partnership  under  the  same  conditions. 
There  is  no  individual  character  in  a  corporation  upon  which 
credit  may  be  based.  It  has  no  moral  status.  It  is  a  "soulless" 
creature  of  the  law,  limited  and  bound  by  legal  enactments. 
As  a  consequence  it  is  entitled  to  a  lower  credit  rating  than 
a  partnership.  Banks  and  credit  men  frequently  require  the 
personal  signature  of  a  responsible  officer  of  the  company  as  a 
guaranty  of  its  obligations. 


PURCHASE    AND    SALE    OF    REAL 
ESTATE. 


CHAPTER  XXXVII. 

LANDED  PROPERTY. 

TITLES;   VALUES;   NINETY-NINE   YEAR   LEASES;   MORTGAGES. 

Private  ownership  in  land  is  a  recognized  right  among  all 
civilized  governments  and  people.  Titles  are  derived  originally 
from  the  government,*  which  continues  to  be  the  paramount 
owner  of  the  land  under  the  doctrine  of  eminent  domain,  and 
which  holds  title  to  all  unclaimed  and  undeveloped  lands.  The 
title  to  the  lands  in  the  United  States  was  acquired  from  Great 
Britain  by  the  treaty  of  peace,  from  France,  Spain  and  other 
countries  by  either  purchase  or  conquest.  The  title  of  the 
European  nations  to  this  immense  territorial  domain,  which 
passed  to  the  United  States  was  founded  upon  their  discovery 
and  conquest.  By  the  customary  European  law  of  nations 
discovery  gave  title  to  the  soil  subject  to  the  right  of  occupancy 

by  the  natives.  The  United  States,  therefore,  de- 
Tities  rived  its  title  to  all  the  lands  within  our  borders, 

subject  to  the  right  of  occupancy  or  use  by  the 
Indians.  The  millions  of  square  miles  of  our  vast  undeveloped 
plains  and  forests  were  called  government  lands  and  this  land 
the  Government  has  parceled  out  and  sold  at  the  minimum  price 
of  $1.25  per  acre,  or  donated  to  individuals  or  corporations  for 
various  considerations.t    The  ^'chain  of  title"  then  begins  with 


♦In  a  monarchical  government  they  are  derived  from  the  king, 
tUnder  the  homestead  law  of  1862  a  settler  was  permitted  to  acquire 
title  to  160  acres  of  Government  land  gratis  under  certain  restrictions  by- 
cultivating  it  five  years. 

845 


346  PURCHASE  AND  SALE  OF  REAL  ESTATE. 

the  Government  and  runs  down  through  the  various  holders 
who  have  taken  it  either  through  purchase  or  descent,  to  the 
present  holder  in  fee  simple,  or  claimant  of  the  land. 

The  ownership  of  real  property  "in  fee  simple"  excludes  all 
qualifications  and  restrictions  as  to  the  persons  who  may  inherit 
it  as  heirs,  thus  distinguishing  it  from  a  "fee  tail."  It  is  the 
largest  possible  estate  a  man  can  have,  being  absolute  in  per- 
petuity. It  is  where  lands  are  given  to  a  man  and  to  his  heirs 
absolutely  without  any  restrictions  or  limitations  put  upon  the 
estate.  The  word  "simple"  in  the  compound  word  "fee-simple" 
adds  no  meaning  to  the  word  "fee"  standing  by  itself.  The 
"fee  tail"  is  an  inheritable  estate  which  can  descend  to  certain 
classes  of  heirs  only.  It  is  necessary  that  they  should  be  "heirs 
of  the  body"  or  "blood  heirs."  The  theory  of  a  "fee  tail"  estate 
was  derived  from  the  old  Eoman  system  restricting  estates. 

Having  extinguished  the  Indian  title  by  treaty  or  otherwise, 
the  next  step  was  to  survey  the  land  into  ranges,  townships  and 
sections  by  means  of  lines  running  north  and  south,  and  east  and 
west,  but  not  including  navigable  streams  or  any  land  especially 
reserved,  such  as  Indian  Eeservations  and  National  Parks. 
Townships  are  six  miles  square  and  contain  thirty- 
Surveys  six  sections  of  six  hundred  and  forty  acres,  each 
section  being  one  mile  square.  These  sections 
are  divided  into  halves,  quarters  and  eighths.  The  ranges, 
townships  and  sections  are  numbered  in  regular  order,  and  hence 
by  knowing  the  number  of  each  we  have  a  brief  and  accurate 
description  of  the  tract.  Salt  springs  and  lead  mines  were 
specifically  reserved  to  the  United  States,  in  all  government 
land,  our  fathers  probably  supposing  these  constituted  the  only 
mineral  wealth  worth  reserving.  One  section  in  every  town- 
ship, numbered  sixteen,  was  reserved  for  the  purposes  of  edu- 
cation. 

When  a  town  or  village  is  laid  out,  all  the  land  included 
within  its  limits  is  platted,  upon  a  map,  accurately  drawn,  which 


LAND   VALUES.  347 

is  kept  in  the  offices  of  the  town  or  city.  Anyone  who  owns 
land  within  the  limits  of  the  town  or  city  may  sub-divide  it  into 
lots  by  having  it  surveyed  by  a  competent  surveyor,  which  survey 
must  be  acknowledged  by  himself  and  the  surveyor  before  a 
notary,  and  a  true  plat  with  such  acknowledgment  filed  with  the 
County  Recorder.     One  who  subdivides  land  usually  names  the 

subdivision  after  himself  and  thereafter  in  describ- 
subdivisions         ing  any  lot  or  parcel  of  the  land  the  description 

must  include,  in  addition  to  the  number  of  the 
township,  section,  and  part  of  section,  the  name  of  the  subdi- 
vision, number  of  block  and  lot.  A  subdivision  may  be  subdi- 
vided again  and  this  is  a  re-subdivision,  or  a  lot  may  be  divided 
into  two  or  more  lots  and  these  are  called  sub-lots.  A  legal 
description  of  a  sub-lot  may  then  read  somewhat  as  follows:  Sub- 
lot  three  of  lot  thirty  in  Brown's  resubdivision  of  the  south 
twenty  acres  of  the  East  one-half  of  the  West  one-half  of  the 
Southwest  quarter,  section  eight,  township  thirty-nine,  range 
fourteen  East  of  the  Third  Principal  Meridian,  Cook  County, 
Illinois. 

Land  values  depend  upon  innumerable  conditions,  and  as  the 
conditions  change  the  values  are  liable  to  change  also.  Farming 
land  is  chiefly  valuable  on  account  of  its  fertility  and  other  favor- 
able conditions  for  raising  produce,  its  nearness  to  market,  trans- 
portation facilities,  etc.     City  lots  are  dependent  for  their  value 

chiefly  upon  location,  those  in  the  center  of  trade 
Values  being  the  most  valuable.     As  cities  grow  older  and 

increase  in  business  and  population,  the  pressure 
for  desirable  lots  in  good  locations  grows  heavier  and  prices  ad- 
vance. Improvements  upon  land,  however,  are  constantly  dete- 
riorating from  age  and  use  and  this  acts  as  an  offset  in  a  degree 
against  the  advance  in  the  land  values.  In  large  cities,  for 
instance  New  York  and  Chicago,  substantial  improvements  are 
frequently  destroyed  and  modern  ones  of  greater  height  erected. 
The  invention  of  the  modern  "skyscraper"  has  made  possible  the 


348  PURCHASE  AND  SALE  OF  REAL  ESTATE. 

carrying  up  of  buildings  to  practically  an  unlimited  height,  sur- 
passing the  renting  space  afforded  in  buildings  of  the  old  type 
and  construction  several  fold,  but  not  necessitating  an  increase  in 
the  size  of  the  land.  The  cost  of  maintenance  and  the  expense 
in  the  operation  of  these  new  buildings  are  proportionately  less 
than  in  the  old.  All  this,  of  course,  has  a  tendency  to  greatly 
increase  the  land  values  of  this  character  of  property. 

Values  of  property  are  largely  determined  by  the  rents  or 
income,  if  it  is  improved,  and,  if  unimproved,  what  income  it 
may  be  made  to  produce.  The  stability  of  property  also  affects  its 
value, — the  question  whether  the  conditions  of  location,  etc., 
will  warrant  a  continuation  of  income.  This  is  determined  by  its 
accessibility  to  transportation,  etc.,  the  properties  in  centers  of 
great  population  being  of  the  highest  value  and  receding  in  value 
from  those  centers  as  their  accessibility  becomes  less.  The  law 
of  supply  and  demand  regulates  to  a  large  extent  the  value  of 
real" property  the  same  as  personal  property.  Property  obtains 
an  abnormal  value  frequently  from  overconfidence  due  from 
various  causes,  that  are  sometimes  not  warranted  by  the  stability 
of  the  community  or  its  industries.  In  growing  towns  and  cities, 
all  classes  of  real  property  are  more  or  less  in  a  transient  state, 
changing  as  the  character  of  localities  change.  Thus  residence 
property  deteriorates  materially  in  the  event  of  the  removal  of 
residents  to  new  and  popular  locations.  As  a  result  properties 
sometimes  a  distance  of  eight  or  ten  miles  from  centers  of  activity 
are  more  valuable  than  intermediate  property.  Business  prop- 
erty then  being  the  most  staple  and  producing  the  greatest  in- 
come, has,  of  course,  the  highest  value,  and  being  in  demand  is 
purchased  to  earn  on  the  lowest  percentage  of  income.  Some- 
times these  properties  are  purchased  to  net  the  investor  as  low 
as  four  per  cent,  per  annum. 

The  most  desirable  form  of  investment  in  property,  and  by 
far  the  safest,  is  to  purchase  land  and  then  lease  it  for  a  long 
period,  usually  ninety-nine  years,  the  lessee  or  lessees  agreeing 


LEASES.  349 

to  pay  general  taxes  and  all  other  obligations  incurred  by  tile 
ownership  of  the  land,  and  in  addition,  as  security  for  the  pay- 
ment of  the  rent  and  all  additions  thereto,  erect  an  improvement 
on  the  property  which  he  maintains  during  the  life 
Ninety-nine-        Qf  ^^q  Jeasc,  Said  improvements  reverting  to  the 

Year  Leases  p     ,       i        i  i  •  n 

owner  of  the  land  at  the  termination  of  the  lease  by 
purchase,  or  otherwise,  according  to  agreement.  It  is  usually  a 
beneficial  arrangement  also  to  the  lessee,  as  it  affords  him  all  the 
rights  of  ownership  of  the  land,  providing,  of  course,  that  the 
ground  rents  and  all  the  covenants  of  his  lease  are  promptly  met, 
without  investing  a  large  sum  of  money  in  the  title.  Long  term 
leases  of  ground  as  previously  stated,  are  usually  made  for  the 
term  of  ninety-nine  years.  This  is  only  a  custom,  following  the 
old  theory  that  a  conveyance  or  letting  of  land  for  a  period  of 
more  than  three  average  life  times,  that  is  three  life  times  of 
thirty-three  years  each,  was  an  absolute  conveyance  and  not  a 
lease.  Leases  may  just  as  properly  and  legally  be  made  for  one 
hundred  years,  or  nine  hundred  years,  or  nine  hundred  and 
ninety-nine  years  as  for  ninety-nine  years. 

Having  investigated  the  present  condition  and  future  pros- 
pects of  a  property  and  decided  upon  its  purchase,  the  buyer 
enters  into  a  written  contract*  with  the  seller,  or  his  agent,  in 
which  the  seller  agrees  to  sell  the  property  at  an 
Real  Estate  agreed  price,  to  deliver  a  "merchantable"  abstract 

Contract  ,         .  ' 

showing  a  perfect  title  in  him,  and  to  convey  the 
same  by  deed  properly  executed.  On  his  part,  the  buyer  agrees 
to  buy  or  receive  the  property  within  a  specified  time,  usually 
thirty  days,  after  a  complete  abstract  of  title  has  been  furnished 
him  by  the  seller,  showing  perfect  title  in  him,  and  to  pay  for  the 
property  the  price  agreed  either  in  cash  or  installments  as  agreed. 
The  buyer  usually  makes  a  cash  deposit  of  about  5  per  cent,  of 
the  purchase  price  when  the  contract  is  executed,  which  is  to  be 


♦All  contracts  with  a  reference  to  the  purchase  of  real  estate  must  be 
In  writing  in  order  to  be  valid. 


350  PURCHASE  AND  SALE  OF  REAL  ESTATE. 

refunded  in  case  the  transaction  is  not  consummated  through  the 
fault  of  the  seller,  or  is  forfeited  to  the  seller  in  case  the  buyer 
fails  to  carry  out  the  agreement.  If  the  transaction  is  consum- 
mated the  contract  money  is  applied  upon  the  purchase  price. 

The  seller  then  furnishes  an  abstract  of  title,  which  may  be 
procured  from  an  abstract  company,  showing  the  complete  his- 
tory of  the  ownership  of  the  property  to  the  present  holder. 
This  is  examined  by  the  buyer  or  his  attorney.*  Past  convey- 
ances, encumbrances,  the  rights  of  heirs,  and  especially  minors, 
judgment  creditors  and  many  other  points  must  be  carefully 
watched  and  scrutinized  in  the  past  history  of  the  property.  So 
many  questions  of  law  are  involved  in  the  examination  of  titles 
to  real  estate  that  a  good  lawyer  is  a  necessity.  Defects  in  titles 
may  be  cured  in  various  ways,  many  of  them  by 
Examination  sccuring  quit  claim  deeds  from  possible  claim- 
ants by  purchase  or  otherwise.  Some  defects  are 
cured  by  time,  while  others  are  incurable.  Properties  sometimes 
lie  unimproved  and  unsalable  in  our  cities  through  some  defect 
in  title  until  lapse  of  time  cures  the  fault.  It  is  needless  to  say 
that  the  buyer  should  be  absolutely  safe  in  the  quality  of  title 
which  he  accepts. 

The  next  step  is  the  execution  and  "passing  of  the  papers" 
which  convey  title.     On  the  part  of  the  seller  or  grantor  this 
consists  of  a  warranty  deed  signed  by  him  and  the  signature  duly 
acknowledged  by  a  notary.     If  the  grantor  is  mar- 
Passingof  ricd,  the  wife,  (or  husband,  as  the  case  may  be,) 

must  join  in  the  execution  of  the  deed,  and,  if  the 
grantor  is  a  bachelor,  or  spinster,  the  fact  must  be  recited  in  the 
deed.  The  buyer,  or  grantee,  on  his  part  pays  the  purchase 
money,  or  in  case  any  portion  of  the  purchase  price  is  to  be  paid 
at  future  dates,  he  executes  notes  therefor,  and  a  mortgage  or 
trust  deed  on  the  property  as  security  for  their  payment.     The 


*We  have  Guaranty  Companies  which  issue  policies  of  insurance  against 
defects  in  titles,  but  the  examination  of  the  abstract  is  the  i^iost  common 
method. 


MORTGAGE  AND  TRUST  DEED.  861 

wife  or  husband  of  the  grantee  need  not  join  in  the  execution  of 
a  mortgage  or  trust  deed  given  to  secure  purchase  money,  but  in 
all  other  cases  where  such  instruments  are  executed  she  or  he 
must  so  join. 

As  explained  in  a  previous  chapter,  a  mortgage  is  virtually  a 
conveyance  of  property  to  the  mortgagee,  with  a  provisional 
clause  that  in  case  a  certain  note  shall  be  paid  upon  a  given  date 
then  the  conveyance  described  in  the  mortgage  shall  be  void  and 
the  title  shall  vest  in  the  mortgagor.  A  deed  of  trust  is  a  con- 
veyance of  property  by  the  mortgagor  to  a  third  person  called  a 
trustee,  to  be  held  by  him  as  security  for  the  notes  given.     After 

the  notes  are  paid  the  trustee  "releases"  or  recon- 
Mortgageand       ygyg  ^j^g   property  to   the   grantor  in  the  trust 

deed  by  the  execution  of  a  release  deed.  This 
is  the  more  common  method  of  securing  real  estate  notes. 
When  there  is  a  default  in  one  note  of  a  series  or  interest 
upon  one  of  the  notes,  by  a  provision  in  the  mortgage  or  trust 
deed  such  default  causes  all  of  the  notes  to  fall  due  at  once  at 
the  election  of  the  trustee  or  legal  owner  of  the  notes.  This  is 
necessary  in  order  that  action  may  be  taken  under  the  mortgage 
or  trust  deed  to  enforce  full  and  complete  payment  and  avoid  the 
necessity  for  foreclosure  proceedings  upon  each  note  separately. 
Mortgages  are  still  used  largely  by  insurance  corporations 
in  loaning  their  surplus  capital,  for  the  reason  that  they  do  not 
expect  to  transfer  the  paper  and  the  mortgage  gives  publicity  to 
the  fact  that  they  are  the  actual  lenders  of  the  money,  but  by 
individuals  the  trust  deed  form  is  preferred  as  it  enables  the 
owner  to  transfer  the  trust  deed  and  notes  without  recourse  or 
publicity,  the  actual  lender  not  being  known  in  the  trust  deed. 
In  1879  a  law  was  passed  in  Illinois  making  the  proceedings  to 
foreclose  a  mortgage  on  real  estate  and  a  trust  deed  practically 
the  same.  Prior  to  that  date  it  was  not  necessary  for  the  mort- 
gagee to  file  a  bill  of  complaint,  etc.,  it  being  only  necessary  for 
him  to  advertise  the  property  a  certain  number  of  days  and  sell 


852  PURCHASE  AND  SALE  OF  REAL  ESTATE. 

it  to  the  highest  and  best  bidder.  The  law  was  no  doubt  enacted 
largely  in  the  interest  of  the  borrower,  giving  him  a  certain  pro- 
tection in  the  event  of  a  fraudulent  foreclosure,  etc.,.  and  for  the 
reason  that  a  trust  deed  conveys  the  property  absolutely  under 
certain  conditions  and  enables  the  paper  to  be  more  readily  sold 
or  used  as  collateral  security  for  loans. 

In  foreclosing  a  trust  deed  or  mortgage  the  complainant  files 
a  bill  of  complaint  in  the  court  having  proper  Jurisdiction,  making 
the  signers  of  the  notes  and  trust  deed,  and  all  parties  having 
any  interest  in  the  property,  defendants.  The  court  usually 
refers  the  case  to  a  Master  in  Chancery  for  the  purpose  of  taking 
evidence  and  arriving  at  a  conclusion  as  to  the  amount  due.  To 
this  report  either  parties  have  a  right  to  file  and  argue  objections 
with  the  Master.     In  the  event  of  the  Master's  report  being 

favorable  to  the  complainant  and  sustained  by  the 
Foreclosure         court,  a  dccrcc  of  Sale  is  entered.     The  Master 

then  advertises  and  sells  the  property  to  the  high- 
est and  best  bidder  for  cash.  This  being  approved  by  the  court 
the  Master  executes  a  certificate  of  sale  to  the  purchaser,  which 
certificate  will  entitle  the  purchaser  or  holder  thereof  to  a  deed 
at  the  expiration  of  the  redemption  period.  This  latter  is  one  to 
two  years  in  different  states*, — a  period  of  time  in  which  the 
mortgagor  may  have  a  final  opportunity  to  recover  his  property 
by  paying  up  his  debt  with  interest  and  costs. 

During  the  continuance  of  the  mortgage  the  owner  of  the 
property  has  what  is  called  "an  equity  of  redemption."  He 
enjoys  the  same  right  of  ownership  over  the  property  (assuming, 
of  course,  that  interest  and  maturing  notes  are  paid  when  due) 
as  though  the  mortgage  and  trust  deed  did  not  exist.  He  has 
the  right  to  transfer  by  deed,  or  to  again  mortgage  the  property, 
subject,  of  course,  to  the  rights  of  the  holder  of  the  previous  lien. 
In  case  the  property  is  sold  while  it  is  under  mortgage  the  pur- 
chaser either  buys  it  "subject  to"  the  mortgage,  or  "assumes  and 

♦In  Illinois  the  redemption  period  is  fifteen  montks. 


EQUITY  OF  REDEMPTION.  353 

agrees  to  pay"  the  incumbrance.  In  this  latter  event,  the  pur- 
chaser of  the  property,  by  accepting  such  a  deed,  obligates  him- 
self personally  to  pay  the  incumbrance  and  in  case  of  foreclosure, 
if  the  property  does  not  sell  for  enough  to  pay  the  mortgage 
together  with  interest  and  costs,  he  may  be  held  for  the  balance. 
It  is  to  the  interest  of  the  purchaser  to  see  that  the  deed  is 
properly  placed  on  record  in  the  office  of  the  Kecorder  of  Deeds. 
If  the  buyer  fails  to  record  his  deed  and  the  seller  should  fraudu- 
lently convey  the  property  over  again  or  mortgage 
Recording  it  to  an  inuoccut  person  who  placed  his  deed  or 

mortgage  upon  record  first,  he,  the  innocent  pur- 
chaser, would  be  protected  in  his  title.  The  same  principle 
holds  in  regard  to  recording  other  documents.  The  mortgagee 
must  at  once  file  his  mortgage  for  record,  lest  another  mortgage, 
sale  or  judgment  takes  precedence  over  it. 


FIRE    INSURANCE. 


CHAPTER  XXXVIII. 

INDEMNITY  FOR   LOSS   BY   FIRE. 
HISTORY;    CLASSES    OF    COMPANIES;    RISKS;    RATES. 

In  the  "Wealth  of  Nations"  the  author*  expresses  the  philos- 
ophy and  purpose  of  fire  insurance  in  the  following:  "  The 
trade  of  insurance  gives  great  security  to  the  fortunes  of  private 
people,  and  by  dividing  among  a  great  many  that  loss  which 
would  ruin  an  individual  makes  it  fall  lightly  and  easily  upon  the 
whole  society."  Fire  insurance  makes  commercial  credit  pos- 
sible.    Without  it  business  would  be  restricted  to  a  cash  basis 

and  the  future  would  be  uncertain  and  unsafe. 
oSect*"**  Fire  insurance  became  a  necessity  when  people 

began  to  accumulate  property  of  a  destructible 
character.  Prior  to  1666,  the  only  sort  of  indemnity  obtainable 
against  loss  by  fire  was  to  be  secured  in  membership  in  guilds 
or  associations  having  for  their  object,  or  one  of  their  objects, 
mutual  relief  in  case  of  fire  loss.  The  great  fire  of  London,  how- 
ever, which  raged  continuously  for  four  days  from  September  2, 
1666,  opened  the  eyes  of  the  world  to  the  possibility  of  loss  by 
fire.  Insurance  by  individuals,  which  is  a  common  practice  in 
England  at  this  time,  became  a  business.  Companies  were  or- 
ganized and  one  of  them  established  in  1696  has  survived  the 
test  of  time  and  is  in  existence  today.  Primarily,  these  com- 
panies were  organized  to  extinguish  fires  in  property  belonging 
to  members,  which  property  was  ordinarily  marked  by  a  tin 
sign.    Incidentally  the  company  assumed  the  loss  by  fire.    The 


*Adam  Smith, 


LLOYDS.  355 

"fire  department"  idea  soon  passed  away,  and  the  insurance 
feature  only  remains;  and  it  has  become  an  integral  part  of  our 
modern  commercial  structure. 

There  are  three  kinds  of  insurance  institutions:  1.  Lloyds* 
or  Individual  Underwriters,  2.  Mutual  Companies  and  (3) 
Stock  Companies.  In  the  Lloyds  system  an  individual,  or  a 
group  of  individuals  acting  each  in  an  individual  capacity 
through  a  common  attorne}^,  enter  into  a  contract  of  insurance. 
The  insurer  known  as  the  "Underwriter"  in  this  case,  personally 
receives  the  premium  and  pays  the  loss,  and  the 
Lloyds  contract  is  just  as  good  as  the  man  or  the  men 

back  of  it.  The  noticeable  disadvantage  of  this 
plan  of  insurance  is  the  necessity,  in  case  of  disagreement  as 
to  the  amount  of  the  loss,  of  bringing  legal  action  against  each 
one  of  the  individual  underwriters  separately.  It  is  also  diffi- 
cult to  ascertain  the  present  or  future  responsibility  of  the  un- 
derwriters who  are  obliged  neither  to  make  statements  nor  to 
maintain  reserves  for  unearned  premiums  or  other  liabilities. 
In  England,  this  system  of  Lloyds  or  individual  insurance  has 
assumed  large  proportions  and  has  attained  a  recognized  stand- 
ing commercially.  In  the  United  States  the  system  is  compara- 
tively unknown.  Whether  it  can  adapt  itself  to  our  conditions 
successfully,  is  yet  to  be  seen. 

In  the  mutual  company  every  member  assumes  a  portion  of 
every  other  members'  risk.    The  policy  holders  are  the  company. 
If  a  loss  is  sustained,  the  policy  holders  are  assessed  proportion- 
ately for  the  loss.     Theoretically,  this  system  of 
Companies  ^^^  iusuraucc  should  be  workable;  practically  it  has 

never  been  successful,  except  in  a  local  or  special 
way.  Mutual  fire  companies  confining  their  operations  to  locali- 
ties where  values  are  widely  distributed,  as  in  the  case  of  farming 


*The  term  Lloyds  originated  from  a  coffee  house  kept  by  Edward  Lloyds 
in  Tower  street,  London,  about  1688,  where  merchants  and  ship-owners 
were  accustomed  to  meet,  and  responsible  individuals  would  assume  risks, 
either  severally  or  jointly,  for  a  premium  consideration. 


356  FIRE   INSURANCE. 

communities,  for  instance,  have  lasted.  It  is  also  true  that 
mutual  fire  companies,  making  a  specialty  of  certain  classes  of 
isolated  manufacturing  properties  have  been  successful.  But 
the  history  of  mutual  fire  companies,  with  the  exceptions  noted, 
has  been  unsatisfactory  in  the  United  States. 

The  stock  company  is  the  fire  insurance  company  as  we  com- 
monly know  it.  It  is  a  corporation  with  a  paid  up  capital. 
If  conservatively  conducted,  it  will  also  accumulate  a 
considerable  surplus  for  the  conflagrations  which  are  sure  to 
come.  This  company  files  and  publishes  annually,  statements  of 
its  condition.  It  is  examined  by  the  state  periodically  or  on 
occasion,  if  an  emergency  arises.  Its  policies  are 
Companies  ^^  ^  standard  prescribed  by  law,  and  its  agents  are 

licensed  by  the  state  in  which  they  reside.  The 
stock  company  is  compelled  by  law  to  set  aside  a  specified  part 
of  its  premium  income  as  "unearned  premium."  So  far  in  the 
experience  of  this  country,  this  system  of  insurance  has  appeared 
to  be  best  adapted  to  our  needs  and  most  satisfactory  for  general 
purposes. 

The  legislatures  of  a  number  of  the  states  have  passed  laws 
prescribing  the  kinds  of  policies  that  companies  may  use  in  those 
states.  These  are  called  standard  policies.  The  so-called  New 
York  Standard  Policy  has  been  adopted  in  a  large  number  of 
the  states  as  the  legal  policy.  In  addition  to  this,  many  of  the 
states  have  enacted  statutes  making  it  obligatory  upon  fire 
insurance  companies  to  submit  their  books,  vouchers  and  securi- 
ties to  the  inspection  of  an  examiner  appointed  by  the  governor 
of  the  state. 

The  consideration  in  an  insurance  policy  is  called  the  premi- 
um. The  premium  is  calculated  at  so  many  dollars  or  cents  per 
$100  of  insurance,  which  is  known  as  the  rate.  For  example,  at 
$1.50  rate,  $3,000  of  insurance  gives  a  premium  of  $45.  This 
is  the  annual  premium.  Policies  for  shorter  periods 
than  one  year  are  written  at  what  are  called  short  rates.    If  the 


RATES.  357 

annual  rate  is  $1.00,  the  short  rate  for  one  month  would  be  20 
cents;  for  two  months,  30  cents;  for  three  months,  40  cents,  etc., 
the  rate  for  the  period  becoming  relatively  smaller 
Rates  as  the  period  approaches  one  year.    There  is  an  es- 

tablished table  of  short  rates  showing  the  rate 
for  every  possible  number  of  days  in  the  365,  composing 
the  year.  On  certain  classes  of  property,  term  policies,  or  policies 
for  longer  than  one  year,  can  be  secured.  On  residence  property, 
it  is  the  prevailing  practice  to  write  two-year  policies  for  one 
and  one-half  annual  rates,  three-year  policies  for  two  annual 
rates,  and  five-year  policies  for  three  annual  rates.  The  entire 
term  premium  must  be  paid  in  advance,  but  the  saving  effected 
by  this  plan  of  term  insurance  is  considerable,  and  amounts  to 
a  large  interest  on  the  anticipated  portion  of  the  premium,  as 
may  be  readily  ascertained  by  an  easy  calculation. 

The  rate,  which  is  the  prime  factor  in  the  estimation  of  the 
insurer,  may  be  determined  in  either  one  of  two  ways.  First,  it 
may  be  made  arbitrarily  upon  the  judgment  of  a  competent 
and  experienced  person,  after  a  personal  examination  of  the 
property  to  be  insured.  Such  rates  are  designated  "flat  rates," 
and  until  recently  nearly  all  the  fire  insurance  rates  were  "flat 
rates."  The  objections  to  such  rates  were  that 
Schedule  Rates  they  Were  not  susceptible  of  analysis  or  explana- 
tion, and  being  made  by  different  persons  or  the 
same  person  under  diverse  influences,  they  were  often  more  or 
less  inconsistent.  Most  of  the  fire  insurance  rates  in  late  years 
are  the  products  of  schedules.  The  schedule  for  frame  buildings 
is  a  comparatively  simple  one.  There  being  no  special  points  of 
construction  to  be  considered,  the  schedule  has  reference  prin- 
cipally to  the  matters  of  occupancy  and  exposure. 

The  schedule  for  brick  buildings  is  a  more  complicated  affair. 
In  this  case  there  is  a  basis  rate  for  a  standard  building  not  over 
a  stated  height  and  specified  ground  area.  The  figure  set  for  this 
standard  building  is  known  as  the  "basis  rate/'  and  it  is  intended 


358  FIRE  INSURANCE. 

to  measure  the  sufficiency  of  the  local  water  supply  and  fire  pro- 
tection, together  with  other  conditions  calculated  to  affect  the 
general  fire  risk  of  the  locality.  To  this  basis  rate 
Basis  Rate  is  added  charges  (made  according  to  carefully  pre- 

pared tables  compiled  from  the  best  obtainable  ex- 
perience) for  the  following  items  entering  into  the  fire  risk. 
The  items  here  given  are  from  the  schedule  for  brick  mercantile 
buildings  of  ordinary  construction  in  use  at  present  in  the  City 
of  Chicago,  Illinois. 

1st.  Height.  For  each  story  over  the  standard  height,  a 
charge  is  made;  this  charge  increases  with  the  stories,  because 
the  difficulty  of  reaching  and  extinguishing  a  fire  increases  in 
proportion  to  the  height  of  a  building. 

2d.  Area.  The  risk  of  spreading  fire  increases  directly  as 
the  area  of  the  building  and  a  charge  is  made  for  area,  over 
standard,  accordingly. 

3d.  Walls.  To  protect  the  building  from  adjoining  build- 
ings and  to  bear  the  weight  of  its  contents,  a  building  should 
have  walls  of  certain  strength,  and  deficiency  in  that  respect  is 
charged  for  in  the  schedule. 

4th.  Communications.  An  opening  into  an  adjoining  build- 
ing makes  possible  the  communication  of  a  fire.  If  the  com- 
munications are  unprotected,  the  buildings  are  rated  as  one  risk. 
If  the  communications  are  protected  by  proper  iron  doors,  there 
is  a  charge  made  on  the  theory  that  the  doors  may  not  be  shut 
in  case  of  fire;  this  charge  increases  with  the  number  of  such 
communications. 

5th.  Exposures.  Charge  is  made  for  exposure  based  upon 
the  seriousness  of  such  exposure,  its  nearness  and  the  precau- 
tions taken  to  guard  against  the  exposure. 

6th.  Elevator  shafts.  Unless  built  of  non-combustible  ma- 
terial with  fire-proof  doors  at  each  fioor,  an  elevator  shaft  acts 
as  a  flue  to  carry  a  fire  to  every  floor  in  the  building,  and  is 
heavily  charged  for  under  such  circumstances. 


RATES.  359 

7th.  Floor  openings.  Stairs  and  other  minor  floor  open- 
ings act  much  as  an  elevator  shaft,  though  in  less  degree,  and 
they  are  charged  for  accordingly. 

8th.  Condition.  It  is  becoming  more  and  more  the  prac- 
tice in  schedule  rates  to  charge  for  unsafe  condition  of  premises. 
These  charges  are  intended  to  be  temporary  in  their  nature,  and 
are  supposed  to  measure  the  hazard  existing  by  reason  of  poor 
condition  of  premises.  As  soon  as  the  premises  are  put  in  safe 
condition  the  charge  is  removed.  By  reason  of  careless  man- 
agement, however,  charges  for  condition  often  amount  to  a 
permanent  charge,  and  become  an  unnecessary  tax  on  the 
business. 

Credits  are  allowed  for  protection  intended  to  prevent  the 
inception  or  the  spread  of  a  fire.  Stand  pipes  with  ladders  on 
buildings,  giving  assistance  to  firemen,  are  the  basis  for  a  credit 
of  one  cent  for  each  story.  Automatic  fire  alarm  service,  or 
telephone  watch  service  reporting  to  a  central  station  is  a 
large  measure  of  protection,  and  for  these  a  credit  of  ten  per 
cent,  of  the  building  rate  is  ordinarily  allowed. 
Credits  Special  construction,  such  as  open  mill  construc- 

tion, and  other  superior  construction,  is  encour- 
aged by  an  allowance  in  the  rate.  Automatic  sprinklers  (a  sys- 
tem of  piping  through  a  building  with  faucets  which  are  opened 
by  the  melting  of  a  fusible  link,  back  of  which  are  adequate 
water  supplies  in  gravity  or  pressure  tanks),  afford  the  best 
protection  known  at  this  time  against  the  spread  of  fire,  and  for 
this  system  of  protection  a  very  considerable  credit  is  allowed  in 
the  insurance  rate. 

There  are  other  charges  and  credits,  but  the  ones  cited  will 
suffice  to  explain  the  theory  on  which  the  unoccupied  building 
rate  is  constructed  in  the  process  of  schedule  rat- 
Buiiding  Rate      ing.    After  the  unoccupied  building  rate  is  ascer- 
tained, a  charge  is  made  for  the  occupancy,  accord- 
ing to  the  hazard  of  such  occupancy,  and  the  result  is  the  rate 


360  FIRE  INSURANCE. 

at  which  the  building  insurance  is  written.     Applying  these 
principles  for  an  example,  we  might  find  such  a  case  as  this: 

"Basis  rate"  (4-story)  $0.40 

Height  (6  stories) 15 

Area  (5,000  ft.  excess) 10 

Walls  (deficient  2  stories) 04 

Communications  (one  protected) 10 

Exposure  (frame — no  shutters) 15 

Elevator  Shaft  (lath  and  plaster) 10 

Floor  Openings  (6) 06 

Gross  unoccupied  building  rate $1.10 

Credit  for  standpipe  and  ladder $0.06 

For  automatic  alarm  (10  per  cent.). .     .11  .17 

Unoccupied  building  rate 93 

Occupancy — Crockery  with  packing 10 

Occupied  building  rate $1.03 

Having  ascertained  the  rate  on  the  building  (which  in  this 
case  is  made  more  than  ordinarily  complex,  for  the  purpose  of 
illustration)  the  next  step  is  to  calculate  the  rate  on  the  contents. 
On  the  theory  that  any  brick  building  is  better  than  its  con- 
tents, there  is  added  to  the  occupied  building  rate  a  certain  sum 
intended  to  measure  the  susceptibility  of  the  contents  to  damage 

by  fire  or  water.  For  example:  Boots  and  shoes 
Contents  ^^  cases  would  classify  twenty-five  cents  more  than 

the  building.  An  open  stock  of  dry  goods,  50 
cents;  a  millinery  stock,  80  cents,  and  a  stock  of  tobacco,  $1.00. 
Taking  the  crockery  stock,  for  example,  there  would  be  added 
to  $1.03  (the  occupied  building  rate)  45  cents  for  a  crockery 
stock,  making  the  rate  on  the  contents,  $1.48  per  $100  of  in- 
surance per  annum. 

If  there  is  more  than  one  tenant  in  the  building,  on  the 


RATES.  861 

theory  that  each  additional  occupant  introduces  some  moral 
and  physical  hazard,  there  is  a  charge  made,  the  amount  of  which 
charge  is  determined  hy  the  nature  of  the  occupation.  If  a 
stock  of  merchandise  occupies  but  one  floor  in  a  build- 
ing, it  is  charged  for  location.  The  grade  floor  is  standard,  with 
no  charge  for  location.  In  the  basement,  ten  cents  are  added 
for  liability  to  water  damage,  while  above  the  first  floor,  the 
^^loading"*  for  each  floor  is  the  square  of  the  floor  occupied.  For 
example  the  loading  for  the  second  floor  is  four  cents,  the  third 
floor  nine  cents  and  so  on.  The  loading  for  stocks  occupying 
more  than  one  floor  is  obtained  by  striking  an  average  for  the 
floors  occupied.  When  the  entire  building  is  occupied  by  a 
single  concern  no  floor  loading  is  made. 

For  buildings  of  fire-proof  construction  there  is  a  "fire-proof 
schedule,"  designed  to  meet  the  different  and  complex  conditions 
found  in  this  important  class  of  risks.  Likewise  for  manu- 
facturing risks,  there  are  special  schedules  intended  to  measure 
the  hazards  existing  in  the  different  processes  of  manufacture 
with  credits  for  safeguards  calculated  to  eliminate  or  reduce  such 
hazards. 


♦Loading  is  a  term  used  for  additions  to  the  basis  rate  on  account  of 
location  or  ot^er  special  conditions. 


CHAPTER  XXXIX. 

FIRE    INSURANCE— Continued. 
BOARDS   OF    UNDERWRITERS;    CO-INSURANCE;    LOSSES. 

Boards  of  Underwriters  are  associations  composed  of  the 
representatives,  managers  or  agents  of  insurance  companies 
doing  business  within  the  state  in  which  the  association  has 
jurisdiction.  Such  boards  are  either  organized  under  the  laws 
of  the  state,  or  are  voluntary  organizations  for  mutual  benefit 
and  protection. 

It  is  the  function  of  Boards  of  Underwriters  to  prepare  and 
apply  schedules  for  rating  the  risks  located  within  their  juris- 
diction. At  the  present  time,  as  schedule  rating  is  little  more 
than  in  its  infancy,  there  are  many  inconsistencies  in  rates  on 
similar  risks  in  different  localities.  Gradually  as  the  scheme  of 
schedule  rating  develops,  the  comparisons  of  experience  of  dif- 
ferent localities  and  the  suggestions  from  central 
Underwriters  Organizations  of  companies  will  equalize  these  in- 
consistencies and  make  the  schedules  more  uni- 
form. It  will  not  be  long  before  the  merchant  or  manufacturer, 
who  now  has  the  satisfaction  of  knowing  that  his  local  competi- 
tors are  rated  under  the  same  schedule  as  himself  will  have  the 
added  satisfaction  of  seeing  his  outside  competition  rated  under  a 
schedule  so  similar  that  it  amounts  to  the  same  for  all  practi- 
cal purposes.  Nevertheless,  it  will  always  be  true  that  certain 
classes  of  risks  will  be  more  profitable  in  one  locality  than  in 
another.  This,  by  reason  of  natural  advantages  and  the  absence 
of  moral  hazard,  and  this  the  fire  insurance  rate  must  always 
take  into  account.  Absolute  uniformity  in  schedules  throughout 
a  wide  territory  is  hardly  practicable  on  that  account. 


BOARDS  OF  UNDERWRITERS.  363 

In  addition  to  the  business  of  making  rates,  the  local  board 
of  underwriters  has  other  and  important  duties  to  perform.  Its 
corps  of  trained  inspectors  is  constantly  at  work  to  reduce  the 
local  fire  hazard  by  requests,  failure  to  comply  with  which,  after 
a  reasonable  time,  subjects  a  risk  to  an  increased  rate  for  poor 
condition.  The  local  board  of  underwriters  stands  also  as  the 
protector  of  the  public  water  supplies,  and  it  has  not  infrequently 
happened  that  boards  of  underwriters,  in  large  cities,  have 
brought  about  the  separation  of  the  fire  department  from  politics. 
Intelligently  administered,  a  local  board  of  underwriters  can 
be  of  large  service  in  a  public  way. 

With  the  exception  of  rates  of  insurance  on  residence  prop- 
erty, practically  all  fire  insurance  rates  are  now  based  on  an 
amount  of  insurance  to  be  carried  equal  to  80  per  cent,  of  the 
actual  cash  value  of  the  property  insured.  This  agreement, 
which  is  a  special  one  written  in  the  policies,  is  variously  known 
as  the  "80  per  cent,  clause"  or  the  "reduced  rate  agreement." 

Its  present  use  grew  out  of  conditions  such  as 
Co-Insurance       this:    One  merchant  with  a  stock  valued  at  $10,- 

000  rating  1  per  cent.,  insured  his  stock  for  $4,000 
at  an  annual  premium  of  $40,  carrying  the  rest  of  his  risk  him- 
self. Another  merchant  also  with  a  stock  valued  at  $10,000  and 
a  1  per  cent,  rate  would  insure  for  $8,000  and  pay  an  annual 
premium  of  $80.  In  case  of  a  $2,000  loss  on  each  of  these  stocks, 
the  companies  would  sustain  a  50  per  cent,  loss  on 
the  first  stock  and  a  25  per  cent,  loss  on  the  second.  That  is, 
the  companies  would  be  obliged  to  pay  $2,000  on  a  $4,000 
policy  in  one  case  and  $2,000  on  an  $8,000  in  the  other.  In 
case  of  a  $4,000  loss  on  each  stock,  the  loss  to  the  companies 
would  be  total  in  the  first  case  and  50  per  cent,  in  the  other.  A 
plan  of  rating  which  permitted  such  inequality  was  certainly 
wrong.  The  merchant  carrying  80  per  cent,  insurance  in  this 
case,  was  twice  as  good  a  risk  to  the  companies  as  the  merchant 
carrying  40  per  cent,  insurance,  and  it  became  evident  that  the 


364  FIRE  INSURANCE. 

rate  must  be  conditioned  on  some  definite  percentage  of  insur- 
ance to  be  carried.  Eighty  per  cent,  insurance  was  generally 
agreed  upon  as  a  fair  requirement.  Companies  were  quite  willing 
that  the  property  owner  should  be  interested  in  his  own  risk, 
to  the  extent  of  taking  the  last  20  per  cent,  of  fire  risk,  if  he 
desired  to  do  so.  There  is  nothing  in  the  80  per  cent,  agree- 
ment, however,  which  prohibits  a  property  owner  from  insuring 
100  per  cent,  of  his  value,  if  he  prefers.  He  may  likewise,  if  he 
chooses,  carry  but  70  per  cent,  insurance,  in  which  case  he  pays 
10  per  cent,  additional  rate,  for  the  greater  liability  to  the  com- 
panies of  a  heavy  loss.  For  60  per  cent,  insurance,  20  per  cent, 
penalty  is  added,  and  for  50  per  cent,  insurance,  the  penalty  is 
30  per  cent.  With  less  than  50  per  cent  of  insurance,  few  com- 
panies would  carry  an  ordinary  risk. 

Notwithstanding  its  general  use,  the  80  per  cent,  clause  is 
widely  misunderstood  by  intelligent  business  men,  the  common 
fallacy  being  that  under  this  clause  the  companies  agree  to  pay 
80  per  cent  only  of  a  loss.  The  actual  operation  of  an  80  per 
cent,  agreement,  in  case  of  a  loss,  can  best  be  illustrated  by 
examples:  Suppose  a  stock,  the  cash  value  of  which  is  $20,- 
000,  requiring  $16,000  of  insurance  under  the  80  per  cent,  agree- 
ment, should  be  partially  destroyed.  In  the  first  example,  let  there 
be  $10,000  insurance,  the  companies  pay  ten-sixteenths  and  the 
owner  loses  six-sixteenths.  In  the  second  example,  have  $12,- 
000  insurance,  companies  pay  twelve-sixteenths  and  owner  loses 
four-sixteenths.  In  the  third  example,  with  $14,000  of  insurance, 
companies  pay  fourteen-sixteenths,  owner  loses  two-sixteenths. 
In  the  fourth  example,  there  is  $16,000  insurance.  Here  the 
conditions  of  the  guaranty  are  complied  with,  and  the  companies 
pay  all  of  the  loss  provided  it  does  not  exceed  the  face  of  the 
policy.  If  over  80  per  cent,  of  insurance  is  carried,  the  guaranty 
is  still  fulfilled,  and  the  companies  pay  the  entire  loss.  In  such  a 
case,  however,  the  loss  would  be  spread  over  a  larger  amount  of 
contributing  insurance  and  fall  lighter  on  each  company,  if 
there  were  more  than  one  company. 


POLICIES.  .  865 

It  is  desirable,  on  occasion,  for  an  insurer  to  secure  a  policy 
covering  property  indefinitely  located,  as,  for  instance,  covering 
merchandise,  being  received  at  and  shipped  from  freight  depots 
and  docks.    Or  on  rented  pianos  beyond  the  control  of  the  owner. 

Or  on  merchandise  being  manufactured  and  in  the 
fnsura^ifce  hauds  of  tailors  or  other  artisans.    In  such  cases, 

and  they  are  numerous,  it  is  usually  possible  to 
secure  a  "floating  policy,"  covering  anywhere,  with  some  rea- 
sonable restriction  as  to  the  amount  for  which  the  company 
shall  be  liable  in  one  fire,  and  a  further  provision  as  to  the  per- 
centage of  insurance  to  be  carried.  Such  floating  policies  are 
usually  at  a  relatively  high  rate,  because  of  the  uncertain  and  in- 
definite liability  assumed  by  the  company. 

It  is  often  convenient  for  a  merchant  occupying  two  or  more 
buildings,  or  a  manufacturer  with  a  plant  consisting  of  several 
buildings,  to  secure  a  policy  covering  stock  in  the  several  build- 
ings or  covering  the  entire  manufacturing  plant  and  its  contents. 

This  can  ordinarily  be  done  under  what  is  termed 
PoUcies  "^  blanket  policy"  which  is  written  to  cover  the 

entire  subject  of  the  insurance  in  or  on  the  several 
buildings.  The  rate  for  a  blanket  policy  is  arrived  at  by  calculat- 
ing the  premium  on  the  value  in  or  on  each  specific  building  at 
its  individual  rate,  and  dividing  the  aggregate  premium  thus 
obtained  by  the  total  amount  of  insurance.  The  result  would  be 
the  average  rate. 

An  insurance  contract  is  not,  as  some  think,  a  "promise  to 
pay"  a  specified  sum  in  case  of  fire.  Neither  is  it,  as  some  would 
have  it  appear,  a  one-sided  contract  by  which  the  company  can 
avoid  a  legitimate  claim.    In  the  nature  of  the  case  an  insurance 

contract  is  drawn  in  general  terms  to  be  used  in 
Contract  a  Variety  of  conditions,  and  it  cannot  have  the 

directness  or  brevity  of  a  single  and  ordinary  con- 
tract between  two  parties.  There  are  a  few  general  features, 
however,  of  an  insurance  policy  or  contract,  which,  if  known, 


366  .  FIRE  INSURANCE. 

would  assist  greatly  in  a  clear  understanding  of  its  terms,  and 
do  much  toward  the  avoidance  of  possible  differences.  At  the 
outset  let  it  be  understood  that  the  insurance  contract  is  per- 
sonal. It  insures  somebody  (not  anybody)  against  loss  by  fire. 
Any  change  in  ownership  must  be  consented  to  by  the  company 
in  writing.  The  subject  of  the  insurance  must  be  definitely  set 
forth  in  the  written  portion  of  the  contract.  A  policy  on  a 
stock  of  boots  and  shoes,  for  instance,  does  not  cover  groceries 
or  dry  goods.  Any  change  in  the  character  of  the  property 
insured  should  be  immediately  and  fully  endorsed  in  writing 
on  the  policy. 

In  lines  16  and  17  of  the  New  York  Standard  Policy,  it  is 
stated  that  the  entire  policy  shall  be  void  "if  the  interest  of  the 
insured  be  other  than  unconditional  and  sole  ownership,"  "un- 
less otherwise  provided  by  agreement  endorsed  hereon."  Failure 
to  conform  to  this  provision  of  the  contract  is  pro- 
Own^rship"^  lific  of  troublc.  If  the  ownership  is  not  sole  and  un- 
conditional, the  character  of  the  ownership  should 
be  fully  set  forth.  For  illustration,  if  a  building  stands  on 
leased  ground,  if  the  ownership  of  property  is  partial  or  con- 
tingent, if  the  property  is  incumbered  or  under  contract,  these 
facts  should  be  clearly  stated  in  the  policy. 

The  policy  also  provides  that  any  change  in  title  or  posses- 
sion of  the  property  will  render  the  policy  void  unless  consent 
of  the  Company  is  first  obtained  in  writing.  The  object  of  this 
requirement  is  to  place  the  Company  in  possession  of  all  facts 
relative  to  each  risk.  If  a  change  is  made  for  any  cause  then 
the  party  insured  should  notify  the  Company  through  its  local 
agent  and  obtain  written  consent  to  the  change. 
Ownership  ^^  ^hc  party  insured  disposes  of  his  interest  in  any 

property  covered  by  a  policy  of  insurance  it  is 
absolutely  necessary  that  the  policy  should  be  assigned  to  the 
purchaser  and  consent  of  the  Company  obtained  to  the  transfer 
or  the  policy  will  become  void.     A  change  from  an  individual 


OWNERSHIP.  867 

ownership  to  that  of  a  copartnership,  or  to  an  incorporated 
company,  or  where  one  partner  retires  from  a  firm  or  a  new 
partner  is  admitted  to  the  firm,  is  a  change  of  ownership  of  firm 
property  and  affects  the  insurance  at  once,  making  the  policy 
void  unless  the  company  is  notified  and  its  consent  obtained  in 
writing. 

In  lines  39  to  44,  inclusive,  of  the  New  York  Standard 
Policy  are  set  forth  certain  articles  which  are  not  insured  unless 
specifically  named: 

"Unless  liability  is  specifically  assumed  hereon,  no  loss  to 
awnings,  bullion,  casts,  curiosities,  drawings,  dies,  implements, 
jewels,  manuscripts,  medals,  models,  patterns,  pictures,  scientific 
apparatus,  signs,  store  or  office  furniture  or  fixtures,  sculpture, 
tools;  nor  property  held  on  storage  or  for  repairs;  nor,  beyond  the 
actual  value  destroyed  by  fire;  nor  loss  occasioned  by  ordinance 
or  law  regulating  construction  or  repair  of  buildings;  nor  by  in- 
terruption of  business,  manufacturing  processes,  nor  otherwise; 
nor  for  any  greater  proportion  of  the  value  of  plate  glass,  fres- 
coes, and  decorations  than  that  which  this  policy  shall  bear  to  the 
whole  insurance  on  the  building  described.'' 

If  any  of  these  are  to  be  insured,  they  must  be  incorporated 
in  the  written  portion  of  the  policy.  With  the  exception  of 
certain  floating  policies,  already  described,  an  insurance  policy 
covers  property  "all  while  contained,"  in  a  certain  specified 
building  or  buildings.  Any  change  of  location  therefore  should 
be  at  once  endorsed  on  the  policy. 

Lines  11  to  30  of  the  Standard  Policy  set  forth  certain  con- 
ditions under  which  the  policy  is  voided,  unless  consent  is  en- 
dorsed in  writing.  Generally  stated  (and  excepting  reference 
to  title,  already  explained)  these  conditions  are:  The  procure- 
ment of  other  insurance,  the  operation  of  a  factory  after  10  P.  M. 
or  ceasing  to  operate  for  more  than  ten  consecutive  days,  any 
increase  of  hazard  within  the  control  or  knowledge  of  the  in- 
sured, the  making  of  extraordinary  alterations  or  repairs,  the  use 


868  FIRE  INSURANCE. 

or  storage  of  volatile  products  of  petroleum  or  other  explosive 
or  highly  inflammable  substances,  the  vacancy  or  non-occupancy 
of  a  building  for  more  than  ten  consecutive  days.  Permission 
for  any  of  these  may  be  obtained,  in  ordinary  cases,  on  applica- 
tion to  the  agent  of  the  company,  which  permission  should  be 
fully  endorsed  in  writing  on  the  policy.  It  should  always  be 
remembered  that  a  fire  insurance  policy  is  a  contract,  subject  to 
the  general  law  of  contracts,  that  usage  does  not  nullify  its 
conditions  and  that  once  voided,  it  can  only  be  revived  by  the 
consent  of  both  parties. 

When  it  is  desired  to  place  a  policy  of  fire  insurance  as 
collateral  security  with  a  bank,  or  with  a  mortgagee  no  written 
assignment  is  necessary,  but  in  such  cases  the  policy  should 

contain  a  clause  "loss,  if  any,  payable  to  

cuuse*^*^^*  as  his  interest  may  appear."  This  is  the  "loss 
payable  clause"  and  is  usually  made  in  favor  of 
the  trustee  of  the  trust  deed  securing  the  loan.  This  clause 
must  be  inserted  by  the  company  or  its  agent. 

Among  Insurance  Companies  it  is  the  custom  for  some  com- 
panies to  issue  a  policy  for  a  larger  amount  than  they  desire  to 
carry  themselves  and  in  order  to  reduce  their  line  on  the  risk 
they  ask  some  other  company  or  companies  to  re-insure  their 
liability  under  the  policy  for  a  certain  amount,  and  for  this 
they  pay  the  other  company  a  consideration  called  the  pre- 
mium. The  original  insured  has  no  claim  on  the  re-insurance, 
his  contract  being  with  the  company  whose  policy  he  holds. 

Comparatively  few  policy  holders  sustain  a  fire  loss.  Other- 
wise the  companies  could  not  afford  to  issue  $1,000  policies  at  an 
average  premium  of  about  $10.  There  must  be  a  goodly  per- 
centage of  "safe  risks."  Nevertheless  there  is  but 
Loss  Claims  one  Way  to  transact  fire  insurance  business,  i.  e., 

on  the  theory  that  there  will  be  a  loss  and  at  once. 
A  fire  insurance  company  conducting  its  business  on  any  other 
theory  would  become  insolvent  and  a  merchant  or  manufacturer 


LOSS  PAYABLE.  369 

who  is  careless,  negligent  or  tardy  about  his  fire  insurance 
will  very  likely  come  to  grief.  It  behooves  a  man  to  place  in- 
surance at  once  when  the  need  for  it  arises,  have  the  policy  is- 
sued, examined,  paid  for  and  put  away  for  safekeeping  with  the 
same  care  and  promptness  that  marks  his  banking  or  other  im- 
portant business. 

When  a  loss  comes,  there  is  a  natural  and  regular  order  to 
pursue,  attention  to  which  will  save  time  and  expense  to  the 
insured  and  company  alike.  First,  notify  the  company  or  its 
agent.  Then  set  about  diligently  to  protect  the  property  from 
further  loss.  After  doing  this  set  out  to  carefully  ascertain  the 
amount  of  the  loss.  If  the  property  is  a  building,  have  com- 
petent persons  furnish  an  estimate  of  the  cost  of  repairing  the 
damage.  If  the  property  is  personal,  prepare  a  schedule,  setting 
forth  in  one  column  the  sound  value,  and  in  the  other  your 
opinion  of  the  loss  or  damage.  With  specific  information  of 
this  character  in  your  possession  you  are  in  a  position  to  ne- 
gotiate with  the  company's  adjuster  intelligently  and  promptly. 
In  case  of  disagreement  with  the  company  as  to  the  amount  of 
loss  the  policy  provides  for  an  appraisal  by  three  competent  and 
disinterested  persons;  one  to  be  selected  by  the  insured;  one  by 
the  company,  the  two  thus  selected  choosing  the  third.  If  the 
property  is  personal  and  totally  consumed  by  fire,  the  value  of 
a  good  set  of  books  and  a  complete  inventory  cannot  be  over- 
estimated. 


LIFE    INSURANCE, 


CHAPTER  XL. 

INDEMNITY  AGAINST  MISFORTUNE. 
HISTORY;  METHODS;  KINDS  OP  COMPANIES;  KINDS  OF  POLICIES. 

Life  insurance  is  the  combination  of  prudent  men  against 
misfortune.     It  is  an  invention  of  civilization  and  a  practical 
application  of  the  principle  of  co-operation,  by  which  many  con- 
tribute small  sums  to  indemnify  one,  or  his  heirs 
Definition  against  misfortuuc.     Property  may  never  burn, 

but  every  life  must  terminate,  and  hence  the  argu- 
ment of  prudence  and  safety  applies  even  more  forcibly  in  favor 
of  life  insurance  than  that  of  property.  Nothing  is  more  un- 
certain than  the  duration  of  human  life,  and  yet  the  problem 
of  this  uncertainty  has  been  reduced  to  a  moral  certainty  by  a 
long  period  of  observations  and  classified  statistics  which  form 
the  basis  of  the  business  of  life  insurance. 

The  mathematical  doctrine  of  probability  was  first,  enun- 
ciated by  Pascal,  the  great  French  scholar,  in  1654,  and  has 
since  been  elaborated  by  other  writers.  In  1671  De  Witt  applied 
it  to  the  duration  of  human  life.  Gradually  the  death  rate  under 
definite  conditions  became  established  from  carefully  preserved 
records.  This  result  is  known  as  the  mortuality 
Pr<^abiiities  tablcs.  Thcsc  tablcs  represent  the  probability  of 
death  of  various  classes  of  persons  under  varying 
conditions,  based  upon  past  experience.  Nothing  is  more  re- 
liable than  the  laws  of  average  when  applied  to  a  large  number 
of  cases,  and  hence  the  business  of  life  insurance  is  not  specu- 

370 


METHODS.  871 

lative,  but  capable  of  the  most  exact  and  conservative  manage- 
ment. 

Life  insurance  was  unknown  to  the  ancients.  It  originated 
in  England  early  in  the  eighteenth  century,  but  the  first  regu- 
larly organized  company  began  business  there  in  1765.  The 
early  companies  did  not  require  a  medical  examination  as  a  part 
of  the  application  for  insurance.     The  rates  of  premium  were 

fixed  by  guesswork,  and  a  board  of  directors  passed 
History  upon  the  applications  for  insurance.    The  business 

of  life  insurance  has  grown  to  enormous  propor- 
tions and  to  a  greater  extent  in  the  United  States  than  in  any 
other  country.  In  1850  there  were  perhaps  a  dozen  "old  line" 
life  insurance  companies  in  existence  in  this  country.  Today 
we  have  about  eighty  companies  with  a  total  amount  of  insurance 
in  force  of  over  $10,500,000,000,  having  assets  of  over  $2,100,- 
000,000  and  a  surplus  of  over  $300,000,000. 

Two  methods  of  life  insurance  are  employed.  The  first  is 
where  a  fixed  and  uniform  rate  of  premium  is  charged,  known  as 
the  "level  premium"  plan,  because  of  the  uniformity  of  the 
premium  charged  throughout  a  given  period.  This  class  of  in- 
surance is  usually  carried  on  by  regularly  organized  companies, 
either  stock  or  mutual,  and  known  as  "old  line"  companies. 

The  level  premium  plan  provides  for  the  payment 
Two  Methods       to  the  Company  of  more  than  the  amount  necessary 

to  cover  the  risk  during  the  early  years  of  the 
policy,  and  the  surplus  thus  accumulated  is  set  aside  as  a  reserve, 
or  invested  in  securities,  which,  with  interest  will  be  sufficient 
to  make  up  the  deficiency  in  later  years.  The  second  method 
is  known  as  "assessment"  insurance  in  which  each  member  of 
the  association  is  required  to  make  payments  into  the  general 
fund  for  the  settlement  of  death  claims,  as  the  needs  of  the  asso- 
ciation may  require,  or  at  stated  intervals. 

It  is  a  well  established  rule  that  the  insurer  must  have  an 
insurable  interest  in  the  life  to  be  insured  for  indemity  is  the 


372  LIFE  INSURANCE. 

fundamental  idea  in  all  insurance.  Insurance  without  being 
coupled  with  an  interest  would  be  a  species  of  gambling.  An 
insurable  interest,  however,  does  not  consist  of  the  ties  of  rela- 
tionship, nor  dependence  for  support  upon  the  life  insured.  In- 
surance may  be  taken  out  upon  the  life  of  anyone 
Interest  ^  whosc  death  would  cause  financial  loss  to  the  bene- 

ficiary. In  England  and  other  European  countries 
it  is  not  unusual  for  business  men  to  take  out  insurance  on  the 
life  of  their  ruler  to  protect  them  from  the  financial  loss  that 
would  be  entailed  by  his  death.  Such  insurance  is  procured  with- 
out medical  examination,  or  even  the  knowledge  of  the  insured. 
In  America  this  class  of  insurance  is  not  written,  but  in  every 
case  it  is  necessary  that  the  applicant  should  pass  a  medical  exam- 
ination and  some  companies  require  an  investigation  into  the 
moral  character  and  financial  standing  of  the  insured. 

Life  insurance  companies  are  divided  into  two  classes,  viz: 
Stock  and  Mutual.  A  stock  company  is  one  which  is  owned  by 
stockholders,  the  same  as  other  corporations,  who  control  its 
management  and  divide  its  profits.  In  some  stock  companies, 
however,  the  policy-holders  are  allowed  a  voice  in  the  manage- 
ment, and  in  this  respect  they  partake  of  the  na- 
ulrcompanies '  *^^^  ^^  mutual  Companies.  Such  companies  may 
be  called  "mixed."  In  a  stock  company  ordinarily 
the  policy  holders  have  no  share  in  the  management  of  the  com- 
pany. A  mutual  company  is  one  which  is  composed  of  policy 
holders  who  elect  the  directors  of  the  company  and  participate 
in  the  earnings.  The  two  kinds  of  companies,  however,  usually 
operate  on  the  same  general  business  methods.  The  mutual 
companies  are  the  more  numerous. 

The  method  of  insuring  lives  which  naturally  first  suggested 
itself  was  to  make  the  contract  of  insurance  for  a  single  year, 
and  then  renew  or  extend  it  from  year  to  year,  after  the  manner 
of  fire  or  liability  insurance,  increasing  the  rate  of  premium  as 
the  risk  increased.     There  is  the  more  reason  for  short  term  con- 


CONTRACT  OF  INSURANCE.  378 

tracts  in  life  insurance  since  the  risk  is  constantly  changing. 
The  insured  is  growing  older  and  may  at  any  time  develop  symp- 
Annuai  and  ^^"^^  ^^  discasc.     Thus  from  birth  to  the  age  of  10 

Long  Term  ycars  the  risk  is  constantly  diminishing  and  then 

very  slowly  begins  to  increase  until  after  middle 
life,  when  it  increases  at  a  constantly  accelerated  ratio. 
On  the  other  hand,  a  property  risk  may  remain  substantially  the 
same  from  year  to  year. 

The  contract  of  insurance  is  based  on  the  application  on  the 
part  of  the  insured,  containing  his  "warranties,  promises,  con- 
sents and  agreements,"  together  with  statements  of  the  com- 
pany's medical  examiner.     The  application  of  the 
Insurance  assurcd,  together  with  the  payment  of  the  pre- 

mium, constitute  the  consideration  upon  which 
the  company's  obligation  rests.  On  the  part  of  the  company,  its 
agreement  is  evidenced  by  the  policy  of  insurance.  A  great 
variety  of  covenants  and  conditions  are  embodied  in  such  pol- 
icies. The  nature  of  these  will  be  considered  under  the  title 
"kinds  of  policies."  In  other  branches  of  insurance,  the  com- 
panies may  cancel  the  policy  at  any  time  by  returning  a  pro- 
rata portion  of  the  premium,  but  this  is  not  so  in  the  case  of 
life  insurance.  A  contract  once  entered  into  and 
brca^n«ied°*  ^  ^^^^  assumcd,  is  binding  upon  the  company  to 
the  end  of  the  term,  unless  cancelled  by  the  consent 
of  the  insured.  To  rule  otherwise  would  be  a  great  injustice 
to  the  insured  since  it  would  leave  him  without  insurance  per- 
haps at  a  time  in  life  when  he  could  not  procure  it  elsewhere. 

Life  insurance  policies  may  be  divided  into  four  general 
classes,  viz:    Term,  Life,  Limited  Life  and  Endowment.    Any  of 
these  may  be  purchased  by  a  single  payment  of 
piudes  premium,  but  the  usual  method  is  to  pay  the  pre- 

mium by  annual  or  semi-annual  installments. 
The  formalities  to  be  complied  with  are  similar  in  all  policy  con- 
tracts— application,  medical  examination,  etc.     A  term  policy 


374  LIFE  INSURANCE. 

merely  provides  insurance  for  a  certain  number  of  years,  at  the 
expiration  of  which  it  terminates  and  has  no  value.    This  is  the 

oldest  form  of  policy.  A  condition  is  sometimes 
Term  inserted  in  a  term  policy  providing  that  it  may 

be  renewed  at  an  increased  rate  at  the  end  of  the 
period  without  a  medical  examination.  Policies  of  this  char- 
acter are  called  "renewable  term"  policies. 

Life  policies  provide  for  the  payment  of  the  face  of  the  policy 
at  the  death  of  the  insured,  whenever  that  may  occur.    A  whole 

life  insurance  is  thus  seen  to  be  a  term  insurance 
Life  for  the  duration  of  possible  life.      Ordinary  life 

policies  provide  for  the  payment  of  premiums 
during  the  life  of  the  insured. 

Limited  life  policies  are  those  in  which  it  is  provided  that 
after  a  certain  number  of  payments  no  further  payment  of 

premiums  is  necessary,  and  that  the  policy  is  fully 
Limited  Life         paid  up.     The  poHcy  may  then  be  held  by  the 

insured  as  an  asset  awaiting  realization  upon  his 
death.  The  periods  for  the  payment  of  premiums  under  such 
policies  are  usually  10,  15  or  20  years. 

An  endowment  policy  is  one  which  provides  that  its  face 
value  shall  be  payable  to  the  insured  at  the  end  of  a  fixed  period 

(10,  15  or  20  years  as  the  case  may  be)  if  he  sur- 
Endowment        vivcs,  or  to  the  beneficiary  if  he  dies  within  the 

period.  This  form  of  insurance  was  introduced 
later  than  the  other  usual  forms.  It  was  expected  that  it  would 
be  the  means  of  inducing  many  persons  to  insure,  who  would  not 
otherwise  do  so,  in  the  hope  of  receiving  the  face  of  the  policy 
during  their  lifetime.  It  especially  appeals  to  those  who 
desire  to  provide  against  need  in  old  age.  Apparently  those  who 
take  endowment  insurance  are  conscious  of  superior  vitality, 
since  the  death  rate  among  endowment  policy  holders  is  espe- 
cially low. 

While    different    companies    have    many    variations    and 


POLICIES.  375 

designations  for  their  different  policy  plans,  each  policy  has  as 
its  foundation  one  of  the  above  forms.  Thus  a  "single  premium" 
policy  is  one  upon  which  the  premium  is  paid  in  one  amount 
when  the  policy  is  issued.  Policies  of  this  kind  are  written 
Single  Premium  ^^^^^r  both  the  life  and  endowment  plans.  Again, 
Continuous  an  installment  policy  is  one  of  the  above  forms  of 

nstaiments  insurance  providing  that  in  case  of  death,  instead 
of  the  face  of  the  policy  being  payable  in  one  sum,  it  is  to  be 
paid  in  a  certain  number  of  annual  installments  (usually  twenty), 
or  it  may  provide  that  a  certain  amount  shall  be  paid  yearly 
as  long  as  the  beneficiary  lives,  and  should  she  die  before  twenty 
years  has  elapsed  the  balance  of  the  twenty  payments  shall  be 
payable  to  the  beneficiary's  estate.  In  that  case  it  would  be 
called  a  "continuous  installment"  policy. 

Another  form  of  insurance  properly  called  an  "installment- 
annuity"  policy,  provides  that  half  the  face  of  the  policy  shall 
be  payable  in  twenty  annual  installments  or  forty  semi-annual 
installments,  the  other  half  of  the  policy  to  be 
Not  a  5  ^  Bond  paid  at  the  end  of  twenty  years  in  one  sum.  Many 
companies  give  this  form  of  insurance  a  name 
which  is  to  some  extent  misleading,  by  calling  it  a  5%  bond. 
They  charge  a  higher  premium  per  thousand  and  represent  the 
face  of  the  policy  as  being  paid  in  twenty  years.  The  twenty 
annual  payments  are  called  coupons,  or  interest  payments.  While 
this  form  of  insurance  is  an  excellent  investment  in  certain 
cases,  the  term  5%  bond  is  misleading  in  that  people  are  induced 
to  believe  that  they  have  an  investment  paying  5%  interest. 

Still  another  form  of  installment  insurance  is  called  a  "sur- 
vivorship annuity"  policy.  This  policy  provides  that  a  certain 
Survivorship  amount  shall  be  payable  yearly  to  the  beneficiary 
Annuity  as  loug  as  he  or  she  lives,  all  payments  stopping 

Policies  ^^  j^.g  ^^  Y^Qj.  death.     Should  the  beneficiary  die 

before  the  insured,  the  policy  lapses.  Some  companies  provide 
that  the  premiums  shall  revert  to  the  insured  in  event  of  the 


876  LIFE  INSURANCE. 

prior  death  of  the  beneficiary.  This  form  of  policy  is  designed 
to  furnish  protection  to  a  wife  or  other  dependent  relative  after 
the  death  of  the  insured  who  is  the  source  of  support. 

A  policy  is  sometimes  issued  upon  the  lives  of  two  people, 
payable  upon  the  death  of  the  first.  Such  are  called  joint-life 
policies.     They  are  sometimes  taken  by  husband  and  wife,  in 

favor  of  their  children,  or  they  may  be  payable 
Joint  Life  to  the  survivor.    More  frequently  they  have  been 

taken  out  by  firms  upon  the  joint  lives  of  the 
partners,  and  payable  to  the  surviving  partner,  thereby  furnish- 
ing him  with  sufficient  ready  cash  to  buy  out  the  deceased  part- 
ners' interest  in  the  business.  For  this  reason  it  is  commonly 
known  as  partnership  insurance.  To  accomplish  the  same  result, 
partners  sometimes  insure  the  lives  of  each  other,  thus  making 
separate  policies  instead  of  joint  life.  On  some  accounts  this 
is  preferable  to  a  joint-life  policy,  since  in  case  of  a  dissolution 
of  the  firm  the  joint  policy  cannot  be  divided. 

There  are  many  firms  and  corporations  whose  prosperity  is 
often  dependent  on  the  ability  of  ita  president  or  manager  and 
the  stock-holders  would  suffer  heavy  loss  in  case  of  his  sudden 
death.  This  is  especially  true  where  a  man  of  ability,  but  with- 
out large  financial  means  is  carrying  on  an  extensive  businesa 
on  other  people's  money.  Many  such  concerns  carry  enormous 
lines  of  insurance  upon  the  life  of  the  man  through  whom  they 
have  so  much  at  stake. 

A  very  few  companies  have  a  scheme  which  they  attach  to 
policies,  providing  that  instead  of  the  insured  paying  all  of  the 
premium,  the  company  will  loan  him  a  portion  of  it  each  year 

at  interest.  The  idea  held  out  is  that  annual  divi- 
Loan  Plan  dcuds  will  carc  for  all  or  a  large  part  of  the  loan. 

This  plan  cannot  be  condemned  too  strongly,  as 
it  results  in  an  unsatisfactory  condition.  If  the  insured  pays  the 
interest  on  these  loans  whose  amount  is  increasing  yearly,  as 
more  premiums  fall  due  then  he  has  a  constantly  decreasing 


PREMIUM  LOAN.  877 

amount  of  insurance  at  a  rapidly  increasing  rate.  But  if  both  the 
loan  and  interest  are  allowed  to  accumulate,  there  is  a  more 
rapidly  decreasing  amount  of  insurance  at  the  same  rate.  In 
either  event  when  this  kind  of  a  proposition  matures  there  is 
likely  to  be  a  Very  much  dissatisfied  policy  holder. 

A  few  companies  issue  what  is  called  Industrial  Insurance. 

This  class  of  insurance  is  issued  on  all  ages  from  one  to  seventy 

years,  in  policies  ranging  from  very  small  amounts 

Insurance  ^P  ^^  ^^^^  ^^  ^^^^'    ^hc  amouut  sold  is  almost 

marvelous.     It  is,  of  course,  sold  principally  to 
people  of  very  limited  means. 

Several  companies  insure  women  on  exactly  the  same  terms 
as  men,  others  charge  an  extra  premium  or  limit  them  to  certain 
plans  of  insurance,  while  some  companies  do  not  insure  women 
upon  any  terms. 


CHAPTEE  XLI. 

LIFE    INSURANCE— Continued. 

PREMIUMS;  DIVIDENDS;   LOANS;  ANNUITIES;  ASSESSMENT 
INSURANCE. 

Premiums  are  payable  on  definite  days  and  unless  the  policy 
provides  otherwise,  the  payments  must  be  ma,de  with  absolute 
promptness.     A  grace   of  thirty  days  is  allowed  under  some 
policies,  and  one  month  under  others,  after  the 
Premiums  ^^^^   ycars'    premiums   are    paid.       The    insured 

should  distinguish  between  thirty  days  and  one 
month  in  this  case,  as  otherwise  the  policy  may  be  allowed  to 
lapse  by  failure  to  make  payment  on  the  proper  day. 

There  are  two  principal  ways  of  disposing  of  the  profits  in 
mutual  companies  arising  under  life  insurance  policies,  viz: — 
annual  dividends  and  accumulation  of  dividends. 

An  annual  dividend  policy  is  one  in  which  the  profits  are 
payable  in  cash  to  the  insured  each  year  as  they  accrue.     An 
accumulation  policy  is  one  in  which  the  profits 
Dividends  ^rc  allowed  to  accumulate  for  a  given  term  of 

years  usually  for  the  length  of  time  the  policy 
has  to  run.  When  dividends  are  deferred  for  periods  of  five,  ten, 
fifteen  or  twenty  years,  the  option  is  usually  given  the  insured 
to  withdraw  the  accumulation  in  cash  at  that  time  or  apply  it 
to  increase  whatever  form  of  surrender  value  is  selected.  Under 
accumulation  dividend  policies,  no  part  of  the  profits  already 
accumulated  is  paid  in  the  event  of  withdrawal  or  death  during 
the  dividend  period.  Different  companies  have  different  designa- 
tions for  an  accumulation  policy,  a  few  of  which  are  "tontine," 
"semi-tontine,"  "deferred  dividend"  and  "distribution"  policies, 
all  of  which  are  based  upon  the  same  general  principle. 

378 


DIVIDENDS.  879 

A  favorite  method  of  a  few  companies  is  to  guarantee  a  cer- 
tain dividend  on  a  policy  and  call  it  a  "guaranteed  dividend" 
policy.  Another  plan  of  theirs  is  not  to  pay  any  dividends  on  a 
policy  but  to  make  a  definite  guarantee  of  a  dividend  payable  at 
maturity  of  the  policy.  Such  is  called  a  "non-participating" 
policy,  meaning  that  it  does  not  participate  in  the  profits  of  the 
company.  A  guaranteed  dividend  policy,  unless  it  provides  for 
additional  dividends,  is  in  reality  also  a  non-participating  policy. 

As  several  elements  go  to  make  up  the  profits  of  a  company, 
such  as  mortality,  interest  rates,  lapses,  expenses,  etc.,  a  life 
insurance  company  never  makes  a  guarantee  without  a  loading 
of  the  premiums  for  all  contingencies.  "Loading"  is  a  certain 
allowance  made  and  added  to  the  premium  in  order  to  cover 
unexpected  losses  or  expenses  before  making  a  guarantee.  While 
guaranteed  dividend  and  non-participating  policies  have  their 
uses,  it  should  be  remembered  that  any  results  procured  under 
either  would  have  been  received  under  a  dividend  paying  policy 
and  also  usually  a  considerable  amount  of  profits  from  the  load- 
ing of  the  premiums  which  a  company  very  seldom  has  use 
for,  but  for  which  every  insurance  company  must  make  allow- 
ance in  order  to  be  perfectly  sound  and  safe  under  all  possible 
conditions. 

While  there  is  a  great  variance  as  to  the  wording  of  life  in- 
surance policies  in  reference  to  their  restrictions  and  conditions 
there  is  almost  as  much  difference  in  reference  to  the  relative 
advantages  in  case  of  the  lapse  of  a  policy  before  its  maturity. 
In  many  companies  after  a  policy  has  been  carried 
frTsuralfct  three  years  or  more  it  has  some  value,  provided 

the  policy  is  surrendered  to  the  company  issuing 
it  within  a  certain  length  of  time.  In  some  companies  a  policy 
would  have  a  value,  had  only  one  annual  premium  been  paid 
thereon. 

Some  companies  provide,  in  case  of  lapse,  for  a  paid-up 
policy  for  a  smaller  amount  payable  at  death  no  matter  when  the 


380  LIFE  INSURANCE. 

insured  should  die  tliereafter,  while  other  companies  have  a  pro- 
vision that  the  policy  shall  run  on  for  a  certain  period  of  time 
for  its  original  amount  of  insurance,  the  length  of  the  extended 
insurance  of  course  being  dependent  upon  the  value  of  the  policy 
at  the  time  of  its  lapse.  Some  companies  also  provide  cash 
values  and  loans  in  lieu  of  paid  up  or  extended  insurance.  The 
policies  of  many  companies  provide  that  within  a  certain  length 
of  time  a  lapsed  policy  holder  may  be  re-instated,  provided 
he  is  in  good  health  and  pays  back  premiums  with  interest  to  the 
date  of  his  re-instatement. 

When  a  few  years  ago  the  privilege  was  given  the  insured 
of  surrendering  his  policy  in  exchange  for  one  of  paid  up  insur- 
ance, it  was  called  a  "non-forfeiture"  provision.  And  when 
upon  failure  to  pay  a  premium  the  insurance  is 
Non-forfeiture  extended  by  virtue  of  former  payments,  this  is 
called  "automatic  non-forfeiture."  Under  a  non- 
forfeiture policy  it  is  now  customary  to  permit  the  insured  to 
resume  the  payment  of  premiums  at  any  time  before  the  value 
of  the  policy  has  become  exhausted  by  lapse,  the  past  due  pre- 
miums and  interest  thereon  being  paid  in  cash  or  permitted  to 
continue  as  a  loan  from  the  company. 

The  policies  of  many  of  the  companies  are  now  made  in- 
contestable after  a  limited  period,  and  one  great  company  issues 
a  policy  which  is  incontestable  from  the  date  of  issue.  Such 
policies  were  issued  in  England  before  they  were 
Incontestability  introduced  here,  an  extra  premium  being  charged. 
By  this  clause  the  company  waives  its  right  to 
contest  the  validity  of  the  policy  for  any  reason  whatever,  and 
yet  it  is  a  question  whether,  in  case  of  fraud,  the  company  would 
not  have  the  right  to  contest. 

The  policies  of  many  companies  provide  that  after  the  in- 
surance has  been  carried  two,  three  or  five  years,  according  to 
the  method  of  each  particular  company,  the  company  will  make 
liberal  loans  on  the  policies  as  collateral  security,  at  a  reasonable 


AN   INVESTMENT.  S81 

rate  of  interest,  usually  5%.  Life  insurance  policies  are  also  fre- 
quently used  as  security  for  loans  from  banks  or  brokers.  Debt- 
ors are  sometimes  required  by  their  creditors  to 
Loans  take  out  insurance  for  the  benefit  of  the  latter, 

so  that  if  the  debtor  should  die,  the  debt  will 
be  provided  for. 

Life  insurance  policies  may  be  assigned  the  same  as  any  other 
valuable  asset.  Unless  payable  to  the  insured  himself  or  his  es- 
tate, the  beneficiary  must  usually  join  in  the  assignment,  but 
the  policies  of  many  companies  are  so  written  that  the  insured 
may  change  the  beneficiary  under  the  policy  at  will  without  her 
consent  or  knowledge.  Of  course  the  company  must  consent 
to  the  assignment. 

The  modern  life  insurance  policies  on  limited  payment  life 
and  endowment  plans  are  so  written,  that  in  case  the  insured 
lives  to  the  date  of  its  maturity  he  will  have  a  good 
an  investme"t^^  investment.  It  must  of  course  be  understood 
that  strictly  investment  insurance  is  written  on 
an  endowment  plan.  Take  for  illustration  a  20-year  endowment 
policy  of  $1,000  which  matures  for  a  little  over  $1,500  in  cash 
at  the  end  of  20  years,  provided  its  profits  will  have  been  allowed 
to  lie  and  accumulate.  Such  a  policy  will  have  made  about  4% 
compound  interest  and  furnished  insurance  for  20  years  without 
cost. 

Stringent  laws  in- nearly  all  the  states  regulate  the  character 
of  the  investments  of  the  policy  holders'  money  and  safe  guard 
his  rights  in  so  many  ways  that  it  is  practically  impossible  for 
an  old  line  life  insurance  company  to  fail.  Every  company  is 
forced  each  year  to  lay  aside  a  sufficient  sum  of  money  which 
compounded  at  a  given  and  very  conservative  rate  of  interest 
will  be  sufficient  to  pay  any  guarantees  contained  in  its  policies. 
For  instance,  in  the  case  of  an  endowment  policy  the  amount 
laid  aside  each  year  must  be  sufficient  when  compounded  either 
at  3  of  4%  interest  according  to  the  rate  used  to  produce  one 


883  LIFE  INSURANCE. 

thousand  dollars  at  the  end  of  twenty  years.  The  amount  of 
assets  is  so  enormous  that  the  companies  are  able  to  hire 
the  best  financiers  that  are  obtainable,  each  a  specialist  in  his 
line,  to  handle  and  manage  their  vast  interests.  These  men  have 
a  knowledge  of  how  and  where  to  invest  money  that  the  poor 
man  or  the  man  in  moderate  circumstances  has  no  means  of 
knowing.  Insurance  provides  a  way  whereby  the  poor  man  can 
invest  fifty  or  a  hundred  dollars  a  year  to  as  good  an  advantage 
as  the  wealthy.  It  must  not  be  assumed,  however,  that  those 
in  moderate  circumstances  are  the  only  ones  who  invest  in  life 
insurance  from  either  an  investment  or  from  an  insurance  stand- 
point, as  our  best  and  wealthiest  business  men  are  found  to  be 
the  heaviest  carriers  of  insurance. 

Originally  when  one  failed  to  pay  the  premium  promptly 
on  the  day  it  was  due  he  divested  himself  of  all  rights  and 
equities  under  his  policy.  Under  the  level  premium  plan,  it 
must  be  remembered  that  the  insured  pays  a  higher  rate  during 
the  first  part  of  the  term  than  the  insurance  actually  costs  in 
order  to  counterbalance  any  deficit  which  may  arise  in  case 

he  should  live  to  an  old  age.  Now  if  for  any  rea- 
vaiues'^*'^  son  the  policy  is  allowed  to  lapse,  it  is  apparent 

that  the  insured  has  overpaid  the  cost  of  insurance. 
Out  of  this  condition  has  grown  the  doctrine  of  the  surrender 
values  of  life  policies.  In  1861  a  law  was  enacted  in  Massa- 
chusetts called  the  "non  forfeiture"  law,  requiring  all  companies 
to  give  extended  insurance  as  a  compensation  to  the  insured  in 
case  of  lapse  of  policies.  About  this  time  the  New  York  Life 
Insurance  Company  introduced  a  policy  of  whole  life  insurance 
paid  up  in  ten  years  and  inserted  the  condition  that  it  could  be 
surrendered  after  being  in  force  for  two  years,  for  paid  up  whole 
life  insurance  for  as  many  tenths  of  the  original  amount  as  full 
years'  premiums  had  been  paid.  Other  companies  adopted  the 
policy  of  allowing  liberal  surrender  values  in  the  form  of  in- 
surance.   The  next  step  was  to  make  the  surrender  value  payable 


SURRENDER  VALUE.  38« 

in  cash  and  this  ca«ie  in  1880.  Most  policies,  after  being  in  force 
for  a  period  may  now  be  surrendered  for  paid  up  insurance,  for 
a  cash  value  or  for  a  life  or  temporary  annuity. 

As  previously  stated,  many  policies  now  provide  that  at  their 
maturity  the  insured  may  take  an  income  for  life  instead  of 
taking  cash  or  paid  up  insurance.  In  England  and  some  parts 
of  continental  Europe,  the  custom  of  purchasing  annuities  has 
been  in  existence  for  a  very  long  time.  In  America,  however, 
the  custom  has  begun  to  grow  only  within  a  com- 
Annuities  paratively  short  time.    An  annuity  is  usually  pur- 

chased by  the  payment  of  a  lump  sum  to  a  life 
insurance  company.  The  company  issues  a  contract  to  pay  a 
certain  amount  yearly  to  the  annuitant  as  long  as  he  or  she 
may  live,  the  annuity  stopping  at  the  annuitant's  death.  An  an- 
nuity is  also  issued  with  the  provision  that  if  the  annuitant  dies 
before  receiving  the  amount  of  his  or  her  original  payment  back, 
the  insured  balance  would  be  payable  to  the  annuitant's  estate. 
A  large  amount  of  insurance  in  this  country  is  supplied  by 
fraternal  or  assessment  associations  upon  the  plan  of  assessing 
all  survivors  pro  rata  in  case  of  the  death  of  a  member.  The 
success  of  this  plan  depends  upon  keeping  the  association  sup- 
plied with  constant  accessions  of  new  members  who  are  young 
in  years  in  order  that  as  the  policy  holders  attain  greater  ma- 
turity of  years  the  average  death  rate  may  not 
fns^urance"*  ^^  iucrcascd  SO  as  to  cause  an  increase  in  the 

frequency  of  the  assessments.  For  if  the  death 
rate  increases  the  effect  is  to  drive  out  the  young  members,  pre- 
vent young  and  healthy  lives  from  coming  into  the  association 
and  leave  only  the  old  and  decrepit  members  who  are  unable  by 
reason  of  their  advanced  years  to  obtain  insurance  elsewhere. 
Some  of  these  fraternal  associations  are  now  accumulating  a 
reserve,  while  others  have  adopted  the  plan  of  a  graded  assess- 
ment, increasing  as  the  insured  advances  in  years,  in  order  to 
meet  the  increasing  death  rate. 


THE    STOCK    EXCHANGE. 


CHAPTEE  XLII. 

DEALING  IN  SECURITIES. 

INCOMES;    INVESTMENTS;    SPECULATION;    GAMBLING    IN    STOCKS. 

From  the  time  when  the  first  company  was  formed  and  its 
capital  represented  by  shares,  which  were  offered  to  the  public, 
or  the  first  responsible  government  issued  its  obligations  in  the 
form  of  bonds  or  promises  to  pay,  the  buying  and  selling  of 
such  securities  may  be  said  to  have  existed.  Dealing  in  such 
forms  of  wealth  is  as  natural,  proper  and  legitimate  as  dealing 
in  dry  goods,  or  any  other  class  of  property.  From  buying  and 
selling  securities  for  the  purpose  of  investment, 
^^^ritlw"*"  it  was  only  a  step  to  the  period  of  speculation  in 
them.  When  the  prospects  of  large  gains  made 
shares  desirable,  as  in  the  case  of  the  East  India  Company,  the 
South  Sea  Company  or  Law's  Mississippi  Company,  the  price 
rose  and  speculation  was  active.  When  a  time  of  commercial 
depression  prevailed,  or  frequent  and  prolonged  wars  and  inter- 
nal strife,  unsettled  or  overturned  governments,  destroyed  com- 
merce and  made  obligations  unsafe,  trading  in  securities  natur- 
ally declined  or  ceased  altogether.  But  as  society  advanced,  and 
governments  became  more  stable,  with  rights  of  property  secure, 
companies  began  to  multiply,  and  as  securities  increased,  specula- 
tion became  more  common  until,  like  every  other  employment, 
it  became  the  principal  or  sole  trade  or  occupation  of  a  particular 
class  of  citizens. 

In  his  History  of  England,  Macaulay  says:  "It  was  about  the 
year  1688,  that  the  word  ^stock-jobber'  was  first  heard  in  Lon- 

884 


LONDON  AND  PARIS.  386 

don.  In  the  short  space  of  four  years  a  crowd  of  companies, 
every  one  of  which  confidently  held  out  to  subscribers  the  hope 
of  immense  gain,  sprang  into  existence.  Extensive  combina- 
tions were  formed  and  monstrous  fables  were  circulated  for  the 
purpose  of  raising  or  depressing  the  price  of  shares."  The 
London  Stock  Hiauia  for  Speculation  increased  until  in  1697  Par- 
Exchange  liament  passed  an  Act  to  regulate  the  business  of 
speculation  in  stocks.  In  1773  the  London  Stock 
Exchange  was  organized  and  now  occupies  an  old-fashioned 
building  in  Capel  Court,  opposite  the  Bank  of  England.  It 
has  a  membership  of  nearly  5,000,  with  an  entrance  fee  require- 
ment of  250  guineas.  Its  scope  is  broader  than  any  other  ex- 
change, since  its  location  at  the  world's  financial  center  gives  it 
a  pre-eminence.  Stocks  in  companies  scattered  all  over  the 
world  are  traded  in,  American,  South  African,  and  Australian 
stocks  being  especially  numerous  and  prominent.  It  is  the  inter- 
national market  for  stocks,  and  bears  the  same  relation  to  the 
world  of  securities  that  the  Bank  of  England  holds  to  the  finan- 
cial world.  The  Bourse,  the  great  stock  market  of  Paris,  was 
founded  in  1736.  Its  operations  embrace  chiefly  European 
securities.  Its  agents  are  not  allowed  to  trade  on  their  own 
account. 

The  great  trading  center  of  America  is  Wall  Street,  in  and 
near  which  are  grouped  the  financial  interests  which  in  a  large 
measure  support  the  New  York  Stock  Exchange.  Securities 
from  all  parts  of  the  United  States  are  here  listed  and  dealt  in. 
There  are  stock  exchanges  in  Boston,  Chicago,  St.  Louis  and 
other  cities,  but  they  possess  chiefiy  a  local  character,  being  lim- 
NewYork  ^^^^  almost  wholly  to  the  securities  in  their  re- 

stock spective  localities.     Each  exchange  has  its  rules 

xchange  ^^^  methods  of  doiug  business,  but  in  a  general 

way,  they  are  similar  and  all  are  patterned  more  or  less  closely 
after  the  New  York  Stock  Exchange.  Many  brokers  in  these 
cities  are  also  members  of  the  N"ew  York  Stock  Exchange,  and 


386  THE  STOCK  EXCHANGE. 

through  this  connection  are  enabled  to  execute  orders  for  securi- 
ties not  listed  in  their  local  exchanges.  The  membership  of  the 
New  York  Stock  Exchange  is  limited  to  1100  and  the  price  of  a 
membership  or  "seat"  is  very  high,  ranging  from  $30,000  to 
$80,000,  depending  upon  the  general  condition  of  the  speculative 
market. 

Widely  different  opinions  prevail  regarding  the  stock  ex- 
change. It  has  been  condemned  as  a  gambling  institution, 
which  unsettles  values  and  injures  legitimate  business,  and  on 
Different  Views  the  othcr  hand,  it  has  been  praised  as  a  necessary 
fhTstocL"^  and    commendable    institution.     Both    of    these 

Exchange  opinions  are,  in  a  measure,  right,  and  both  are 

partially  wrong.  As  a  market  for  securities  the  Stock  Exchange 
is  unobjectionable — is  a  great  convenience  to  both  buyers  and 
sellers.  Capitalists  who  do  not  wish  to  loan  their  money  or 
invest  in  real  estate  may  here  buy  securities  which  will  produce 
a  desired  income,  and  others  desiring  to  convert  securities  into 
ready  money  are  brought  into  immediate  communication  with 
buyers  through  this  instrumentality.  The  Stock  Exchange  pro- 
vides a  place  for  the  investment  of  savings.  Not  every  person 
can  invest  in  land  or  mortgages.  These  are  limited  in  quantity 
and  besides  are  beyond  the  financial  capacity  of  most  of  those 
with  small  savings.  Corporations  are  now  numerous,  and  secur- 
ities,— both  stocks  and  bonds — are  so  plentiful  that  they  consti- 
tute the  chief  form  of  investments.  Bonds  and  stocks  of  ap- 
proved quality  have  the  advantage  over  real  estate 
fnves^ment°*^  of  being  easily  hypothecated  as  collateral  for  loans, 
or  converted  into  cash  by  sale.  The  Stock 
Exchange,  therefore,  in  so  far  as  it  affords  facilities  for  making 
legitimate  investments,  is  an  undoubted  benefit  to  the  business 
world,  and  an  aid  to  the  progress  and  development  of  the  coun- 
try. Were  stocks  and  bonds  not  readily  salable,  investors  would 
not  buy  them,  and  were  this  the  case,  great  enterprises  such  as 
railroads,  large  manufacturing  establishments,  and  the  like  could 


PURCHASE  OF  INCOMES.  387 

not  be  constructed.     In  a  recent  treatise  entitled  "The  Work  of 
Wall  Street/'  Mr.  Sereno  S.  Pratt  very  aptly  says: 

"A  stock  market  is  an  income  market.  It  is  a  place  where 
incomes  are  bought  and  sold.  No  one,  it  is  true,  goes  to  the 
Stock  Exchange  as  he  might  to  an  insurance  company,  and, 
paying  over  the  requisite  amount  of  money,  buys  an  annuity. 
Yet,  essentially,  the  stock-market  operation  is  the  same.  The 
stocks  and  bonds  traded  in  on  the  Stock  Exchange  would  be 
worthless  unless  they  represented  value,  either  present  or  pros- 
pective.    Bonds  and  preferred  stock  generally  represent  fixed 

income.  Common  stocks  represent  speculative 
Incomer  °  iucome, — that  is,  income  that  may  vary  from  year 

to  year,  according  to  the  earning  capacity  of  the 
corporation  issuing  them.  If  a  company  has  no  income  and  no 
prospect  of  earning  one,  its  securities  are  worth  no  more  than 
so  much  waste  paper.  It  is  true  that  the  stocks  of  an  insolvent 
company  are  often  quoted  in  the  market,  but  their  value  consists 
in  the  control  of  the  charter,  the  franchise,  or  some  other  privi- 
lege from  which  it  is  believed  an  income  may  sometime  be  de- 
rived. Several  months  ago  a  list  of  48  non-dividend-paying 
stocks  was  published  whose  average  market  price  was  41,  but 
every  one  enjoyed  the  prospect,  immediate  or  remote,  of  future 
dividends.  There  could  be  no  stock  market  if  there  were  no 
incomes.  In  Paris  an  investor  will  say  to  his  broker,  "Buy  me 
enough  rentes  to  pay  me  an  income  of,  say,  50,000  francs  a  year.'^ 
He  goes  into  the  market  to  buy,  not  rentes,  but  income.  In  New 
York  the  investor  does  not  express  himself  so  directly.  He  says 
to  his  broker,  "Buy  me  $500,000  of  bonds."  Now,  what  he  is 
actually  buying  is  not  bonds,  but  the  income  the  bonds  will  yield. 
Before  placing  the  order  he  has  calculated  exactly  what  will  be 
the  income,  taking  into  account  the  premium  paid,  the  interest 
promised,  and  the  duration  of  the  bond.  All  investments  are 
thus  made  on  the  income  basis. 

From  an  investment  to  a  speculation  is  only  a  short  step.    A. 


888  THE  STOCK  EXCHANGE. 

buys  a  share  of  stock  or  a  bond,  pays  for  it,  and  lays  it  aside  in 
order  to  derive  an  income  from  it.  That  is  an  investment.  B. 
buys  a  stock  or  bond  and  holds  it,  expecting  a  rise  in  its  value, 
when  he  may  sell  it  at  a  profit.  That  is  a  speculation.  B.'s 
transactions  are  perfectly  legal,  moral,  and  in  every 
Speculation  way  legitimate.     Every  dealer  in  dry  goods,  gro- 

ceries, or  farm  products,  and  a  large  proportion  of 
those  who  buy  land,  buy  with  the  expectation  of  selling  again  at 
a  profit.  Then  again,  one  who  buys  property  as  an  investment 
may  find  its  market  value  so  increased  within  even  a  very  short 
time,  that  he  concludes  to  turn  his  investment  into  a  speculation, 
and  sells,  intending  perhaps  to  buy  another  kind  of  property  or 
investment.  Thus  we  see  by  analysis,  the  operations  of  the 
investor,  the  merchant  and  the  speculator  are  essentially  the 
same  in  principle,  and  to  condemn  one  is  to  condemn  all. 

Is  speculation  a  benefit  to  the  business  world?  Would  the 
business  world  be  benefited  if  speculation  were  entirely  prohib- 
ited and  all  stock  exchanges  and  produce  markets  either  wiped 
out  of  existence  or  restricted  to  purely  investment  transactions? 
Eadical  and  unthinking  persons  have  declared  emphatically  an 
affirmative  to  this  latter  question.  They  have  even  introduced 
bills  into  legislative  bodies  for  the  abolishment  of  produce 
and  stock  exchanges.  All  advanced  and  progressive  nations  have 
their  exchanges  in  which  speculative  transactions  form  a  large 
part  of  the  business  done.  By  means  of  the  trading,  both  specu- 
lative and  for  investment  purposes,  these  exchanges  act  as  bal- 
ance wheels  upon  prices.  When  prices  advance, 
Is  Speculation  holders  begin  to  sell,  and  when  prices  fall,  abnor- 
mally low,  buyers  are  attracted,  and  their  pur- 
chases tend  to  raise  the  market  price  to  its  normal  condition. 
Thus  extreme  fluctuations  are  in  a  measure  prevented  by  specula- 
tion.*    Then  again,  the  experienced  speculator  having  a  prophetic 


♦This  law  is  trodden  under  foot,  when  in  the  case  of  a  "corner"  a  single 
individual  or  a  coterie  of  operators  temporarily  buy  iip  and  control  a  particu- 
lar commodity  and  force  its  price  up  abnormally. 


SPECULATION.  889 

vision,  may  see  in  the  future  a  season  of  favorable  conditions 
which  will  increase  the  market  value  of  stocks.  Accordingly, 
he  buys  now,  thus  raising,  in  a  measure,  present  prices,  and  in 
the  future  he  sells,  his  sale  tending  to  supply  the  demand,  and 
lower  prices.  His  mission  then  as  a  speculator  has  been  a  benefit 
to  others.  Henry  Clews,  before  a  Legislative  Committee  in  New 
York,  said:  ^^Speculation  is  a  method  of  adjusting  differences  of 
opinion  as  to  future  values,  whether  of  products  or  of  stocks.  It 
regulates  production  by  instantly  advancing  prices  when  there 
is  a  scarcity,  thereby  stimulating  production,  and  by  depressing 
prices  when  there  is  an  overproduction.^' 

Speculators  usually  buy  on  a  margin.  Instead  of  paying  for 
the  stock  in  full,  they  virtually  buy  the  stock  on  credit,  leave  it 
in  the  broker's  possession,  and  pay  enough  cash  on  the  purchase 
to  cover  any  possibility  of  a  loss  to  the  broker.  Thus  instead  of 
buying  fifty  shares  of  stock  at  $100  each  and  paying  $5,000  for  it 
in  full,  the  buyer  pays  down,  say  $10  on  each  share,  or  10  per 
cent,  of  the  par  value  as  a  margin,  and  is  thus  able  to  buy  ten 
times  as  much,  with  a  corresponding  increase  in  profit  if  the 
market  proves  favorable.  Since  he  expects  to  soon  sell  the  stock, 
it  is  not  essential  that  he  should  buy  wholly  for  cash.  Neverthe- 
less, it  is  an  actual  sale,  and  delivery  of  the  stock  to  him  is  con- 
templated unless  he  otherwise  disposes  of  it  before  delivery. 

The  broker  charges  interest  on  the  unpaid  balance 
Buying  on  Q-f  |-j^g  purchasc  moucy.     Were  buyers  required  to 

pay  in  full  for  all  stock  purchased,  their  transac- 
tions would  be  restricted  to  a  comparatively  small  volume.  They 
have  the  same  moral  right  to  use  the  credit  system,  as  the  retailer 
who  buys  of  the  wholesaler  and  pays  part  of  the  purchase  price, 
the  balance,  perhaps,  to  be  paid  after  a  portion  of  the  goods  have 
been  sold;  or  as  the  buyer  of  real  estate  who  makes  his  first  pay- 
ment and  sells  the  property  before  the  next  payment  falls  due. 
It  is  true  the  buyer  on  a  margin  takes  a  greater  risk  than  either 
of  these,  for  his  purchase  is  larger  in  proportion  to  his  capital 


390  THE  STOCK  EXCHANGE. 

invested,  and  if  the  market  should  go  against  him,  he  might  lose 
his  entire  investment.  But  he  is  a  buyer  on  credit,  the  only  dif- 
ference being  that  a  greater  degree  of  credit  is  extended  to  him 
on  account  of  the  custody  of  the  property  remaining  with  the 
broker  as  security. 

There  is  a  point,  however,  where  speculation  degenerates  into 
gambling.  The  feverish  desire  for  sudden  riches,  and  the  fas- 
cination that  attends  the  uncertainty  of  speculative  operations, 
often  lead  men  away  from  strictly  legitimate  transactions  and 
they  become  reckless, — mere  gamblers  upon  the  turn  of  the  mar- 
ket. The  speculator  is  one  who  studies  the  condition  of  finance 
and  trade,  both  present  and  future,  with  especial  reference  to 
their  effect  upon  the  stock  market,  and  bases  his  action  upon  well 
drawn  and  conservative  conclusions,  shaping  his  course  so  as  to 

meet  conditions  of  the  money  market  as  he  antici- 
stocks^"^  ^"         pates  them.     He  exercises  the  same  judgment  and 

discrimination  that  a  wholesale  merchant  or 
banker  employs  in  the  conduct  of  his  business.  The  gambler 
in  stocks,  on  the  contrary,  makes  no  calculations,  but  "goes  it 
blind,"  buying  and  selling  merely  on  his  impulse,  and  "trusting 
to  luck"  for  the  result.  His  operations  are  not  based  upon  a 
study  of  the  future,  but  upon  "tips."  He  makes  no  effort  to 
control  or  meet  future  conditions.  In  short,  he  does  not  differ, 
so  far  as  the  intent  is  concerned,  from  one  who  puts  money  on  a 
horse  race  or  a  throw  of  dice.  No  wonder  such  operators  almost 
universally  "go  broke"  sooner  or  later. 

Since  the  intrinsic  value*  of  any  given  bond  or  stock  remains 
practically  unchanged  from  day  to  day,  or  gradually  increases  in 
value  according  as  the  company  is  prosperous  or  otherwise,  why 
should  the  market  value  fluctuate  so  rapidly  and  radically,  on 
'Change,  is  a  mystery  to  many  persons.     Some  of  the  most  stable 


♦stocks  and  bonds  have  three  values,  viz.:  par  value,  or  normal  value; 
intrinsic  value,  or  real  and  inherent  worth;  ancl  market  value,  or  what  it 
will  bring  when  sold.    These  three  values  may  be  widely'  diflferent. 


FLUCTUATIONS.  391 

and  reliable  stocks  in  well  established  companies,  paying  nearly 

uniform  dividends  from  year  to  year,  flucturate  in  price  on  the 

market,  to  a  surprising  extent.     Thus  St.  Paul 

fn^M^^u?"'"     railroad  stock  has  been  known  to  fluctuate  $50  a 

the  Market 

share  within  a  few  months,  with  little  or  no  change 
in  its  real  earnings.  A  stock  which  earns  five  per  cent,  fre- 
quently sells  for  less  than  one  which  is  earning  four.  This 
seeming  inconsistency  can  only  be  explained  as  one  of  the  results 
of  speculation  and  the  manipulations  of  the  market  by  shrewd 
operators.  Mr.  S.  S.  Pratt,  in  illustrating  this  feature  of  the 
stock  market,  says:  "A  man  owns  a  house  from  which  he  derives 
a  net  income  of  $1,000.  The  house  is  worth,  say,  $20,000,  and 
the  income  of  $1,000  is  5  per  cent,  on  the  investment.  But  if  he 
had  to  sell  the  house  quickly  he  might  not  find  a  ready  pur- 
chaser, and  would  have  to  sacrifice  the  property,  say,  for  $10,000. 
There  has  been  no  change  in  the  actual  worth  of  the  house.  It 
is  in  as  good  condition  as  before,  and  the  income  continues,  but 
the  price  is  50  per  cent,  of  its  true  value.  Or,  the  owner  of  the 
property  may  find  that  a  corporation  wants  it  for  some  important 
purpose,  and  is  willing  to  pay  a  big  price  for  immediate  posses- 
sion. In  this  case  an  urgent  demand  has  advanced  the  price, 
although  there  has  been  no  change  in  income.  Let  us  carry  the 
illustration  further.  Suppose  the  corporation  wants  the  prop- 
erty, but  wants  it  cheap,  and  is  willing  to  wait  a  while  for  it. 
Thereupon  it  begins  to  manipulate  the  market  for  real  estate  in 
that  vicinity.  By  various  expedients  it  impresses  the  owner  with 
the  belief  that  the  prices  of  property  on  the  street  are  likely  to 
decline,  and  that  he  had  better  sell  for  what  he  can  get  now, 
than  wait  and  perhaps  do  worse." 

N'ow,  transfer  the  foregoing  illustrations  to  the  transactions 
on  the  stock  market,  and  the  reasons  for  many  of  the  fluctuations 
in  stocks  will  be  apparent.  The  stock  market  is  filled  with 
shrewd  men  who  study  the  present  and  future  conditions  of  the 
market.     They  know  in  a  general  way,  who  hold  certain  stocks. 


892  THE  STOCK  EXCHANGE. 

and  they  endeavor  to  create  conditions  which  will  affect  the 
market  in  their  favor, — enable  them  to  buy  cheaply  or  sell 
dearly.  If  they  can  create  an  impression  that  will  depress  the 
price  of  a  given  stock  in  future  it  tends  to  depress  it  now.  Some- 
times they  sell  stocks  to  create  the  impression  that  they  are  "un- 
loading" on  account  of  an  expected  fall  in  price,  while  at  the 
same  time  they  are  buying  the  same  stocks  secretly  through 
another  broker,  taking  care  to  buy  more  than  they  are  selling. 
Just  how  far  deception  in  stock  manipulation  can  be  carried 
without  becoming  dishonesty  is  difficult  to  determine,  but  open 
lying,  such  as  spreading  a  false  or  malicious  rumor  in  order  to 
affect  the  market  is  considered  disreputable,  and  beneath  any 
gentleman  both  on  the  stock,  as  well  as  produce  markets.  A 
"corner"  is  the  extreme  of  manipulation,  and  consists  in  controll- 
ing practically  all  the  stock  of  a  kind,  with  the  result  of  forcing 
those  who  are  short  to  buy  the  stock  at  a  fictitious  price  in  order 
to  fill  their  contracts. 


CHAPTER  XLIII. 

THE  STOCK  EXCHANGE.     (Continued.) 

BROKER;   BULLS   AND    BEARS;    LISTING    SECURITIES. 

The  stock  broker  acts  as  the  middleman  in  negotiating  eon- 
tracts  between  buyer  and  seller,  but  in  a  legal  sense  is  the  agent 
of  only  one  party  to  the  transaction.  Since  the  trader  must  rely 
very  largely  upon  the  advice  of  his  broker,  it  becomes  of  first 
importance  that  the  broker  should  be  a  cool-headed  man,  whose 
judgment  concerning  all  matters  relating  to  the  stock  market 

can  be  taken  as  accurate.  The  broker  is  supposed 
Broker**  to  keep  himsclf  thoroughly  posted  as  to  passing 

events  in  the  financial  and  commercial  world,  both 
at  home  and  abroad.  His  view  must  be  a  comprehensive  one, 
and  he  must  be  able  to  recommend  a  wise  course  of  action  for  his 
client,  based  upon  his  mature  judgment  of  the  future.  The 
established  brokerage  charge  is  one-eighth  of  one  per  cent,  upon 
the  par  value  of  the  stock  bought  or  sold,  for  either  buying  or 
selling,  or  one-fourth  of  one  per  cent,  for  what  is  called  a  "round 
trade,^^  consisting  in  both  buying  and  selling  the  stock.  Some 
brokers  do  a  strictly  commission  business,  while  others  combine 
this  with  trading  on  their  own  account. 

A  "short"  is  one  who  has  sold  stock  that  he  does  not  own, 
but  which  he  hopes  to  buy,  before  time  for  delivery,  at  a  price 
below  that  for  which  he  sold.     Since  it  is  now  to  his  advantage 

to  depress  the  market  in  order  that  he  may  be  able 
Bulls  and  Bears    to  fill  his  coutracts  at  a  lowcr  price,  he  is  a  ''bear" 

in  the  market,  and  his  efforts  are  devoted  to 
"bearing"  or  pounding  the  price  downward.  When  a  "short" 
has  been  able  to  buy  enough  stock  to  fill  his  contracts  he  is  said 


894  THE  STOCK  EXCHANGE. 

to  have  "covered."  If  he  finds  himself  unable  to  cover  except 
at  a  loss,  he  may  "liquidate/'  which  consists  in  paying  the  dif- 
ference to  the  other  party.  A  "long"  is  exactly  the  opposite  of 
a  short, — one  who  has  bought  more  stock  than  he  had  contracted 
to  sell,  and  is  therefore  anxious  that  the  market  should  advance, 
in  order  that  he  may  dispose  of  his  holdings  at  a  profit.  He 
is,  therefore,  interested  in  tossing  the  price  upward  by  every 
means  within  his  power,  and  hence  is  called  a  "bull."  A  "bull 
market"  is  one  in  which  prices  are  advancing.  A  "bear"  market 
is  one  in  which  prices  are  declining. 

A  "put"  is  the  right  which  a  broker  has  by  contract  to 
deliver  to  another  a  specified  amount  of  a  stock  at  an  agreed 
price  within  a  specified  time.  If  the  market  declines,  the  broker 
p^^g  who  has  a  "put"  may  buy  the  stock  and  deliver  it 

Calls  at  a  higher  price,  realizing  the  difference  as  a 

^P"""^^  profit.     A  "call"  is  the  right  to  demand,  or  call  for 

a  specified  amount  of  stock  at  an  agreed  price,  within  a  fixed 
time.  The  owner  of  a  "call"  is  a  bull.  It  is  to  his  advantage  to 
have  the  price  advance,  for  then  he  may  call  his  stock  and  sell 
it  at  an  advance.  A  "spread"  is  a  combination  of  a  put  and  a  call. 
The  holder  of  a  spread  has  the  privilege  of  delivering  the  stock 
at  one  price  or  calling  it  at  another.  For  the  privilege  of  a  put, 
call  or  spread,  a  fee  is  paid  by  the  broker  who  buys  it,  varying  in 
amount,  according  to  the  value  of  the  privilege  as  estimated 
according  to  the  condition  and  probabilities  of  the  market. 

Numerous  terms  in  addition  to  those  already  mentioned  have 
been  coined  especially  for  the  stock  market.  A  "point"  is  one 
per  cent,  in  the  price  of  a  stock  or  bond.  The  market  is  "steady" 
Language  whcu  it  holds  its  owu,  "firm"  when  it  advances, 

of  the  stock  and  "weak"  when  it  declines.     A  "pool"  is  a  com- 

bination of  operators  acting  together  for  a  com- 
mon end.  A  "blind  pool"  is  one  in  which  all  the  operators  are 
kept  in  ignorance  of  its  operations  except  the  one  person  who 
manages  it.     The  object  to  be  attained  is  absolute  secrecy.     A 


LISTING  SECURITIES.  395 

"wash  sale"  is  a  fictitious  transaction  made  by  two  or  more  mem- 
bers who  act  in  collusion  merely  for  the  purpose  of  giving  the 
appearance  of  a  rise  or  fall  in  the  price  of  a  certain  stock,  or 
swelling  the  volume  of  its  apparent  sales  and  thus  influencing 
others  to  buy  or  sell. 

Listing  securities  consists  in  placing  them  upon  the  records 
of  the  stock  exchange  so  that  they  may  be  traded  in  by  members. 
Securities  not  thus  recognized  or  listed  cannot  be  the  object  of 
transactions  upon  the  floor  of  the  exchange.  Listing  stocks  or 
bonds  does  not  make  the  exchange  a  guarantor  of  their  value, 
but  is  an  evidence  of  their  genuineness.  Buyers 
Securities  must  judgc  f or  thcmselvcs  the  value  of  the  securi- 

ties which  they  purchase.  By  the  operation  of 
listing,  however,  the  securities  are  required  to  pass  an  investiga- 
tion which  in  a  measure  establishes  their  character  as  reliable, 
and  thus  to  a  certain  extent  protects  the  buyer.  A  corporation 
desiring  to  have  its  stock  or  bonds  listed,  must  file  a  written 
statement  with  the  Listing  Committee  of  the  Stock  Exchange, 
setting  forth  the  fullest  details  concerning  the  company  and  its 
securities, — its  name,  date  and  place  of  organization,  authorized 
capital,  amount  of  stock,  preferred  and  common,  amount  actu- 
ally paid  in  on  the  stock,  amount  of  liability  of  stock  holders, 
name  and  address  of  the  Eegistrar,  description  of  the  assets  of 
the  company,  detailed  statement  of  the  nature  of  the  company's 
liabilities,  gross  and  net  earnings  for  the  past  year  if  the  com- 
pany has  been  in  business  that  long,  or  a  copy  of  the  company's 
balance  sheet  for  the  previous  year,  also  a  description  of  the 
bonded  indebtedness  outstanding  of  the  company,  if  any,  names 
and  addresses  of  the  officers  and  directors,  etc.  Thus  a  full  his- 
tory of  the  past,  and  a  description  of  the  present  condition  of  the 
company  is  placed  on  record  with  the  Stock  Exchange  Commit- 
tee, who,  after  due  consideration,  vote  to  refuse  or  admit  the 
securities  to  the  privilege  of  the  Stock  Exchange.  With  these 
safeguards  thrown  around  the  market,  together  with  the  re- 


896  THE  STOCK  EXCHANGE. 

quirements  usually  added  by  the  listing  committee  that  a  Trust 
Company  shall  act  as  trustee  of  the  mortgage  and  registrar  of 
the  bonds,  if  bonds  are  to  be  floated,  investors  may  deal  in  securi- 
ties with  a  large  degree  of  confidence  and  safety.  Banks  will 
accept  listed  securities  as  collateral  more  readily  than  others. 

No  one  but  members  are  allowed  upon  the  floor  of  the  ex- 
change. All  buying  and  selling,  or  agreements  to  buy  and  sell 
are  made  by  oral  contracts.  The  member  making  the  offer 
specifies  the  number  of  shares,  the  fractional  part  of  the  price, 
(such  as  f  in  case  the  quototion  is  103f )  and  the  terms  of  the 
Buying  and  ^^^^-     ^^^u  no  amouut  of  stock  is  named  in  an 

Selling  offer  100  shares  of  the  par  value  of  $100  each  is 

ecunties  understood.     The  terms    of   the    sale   are   either 

^^cash,"  that  is  for  delivery  and  payment  upon  the  day  of  sale, 
"regular"  that  is,  delivery  and  payment  upon  the  next  business 
day  following  the  sale;  "at  three  days,'^  which  is  for  delivery  and 
payment  upon  the  third  day  following  the  sale,  or  for  "buyers 
option"  or  "sellers  option,"  which  is  after  three  days  and  within 
60  days  after  the  date  of  making  the  contract,  at  the  option  of 
the  party  holding  the  privilege  or  option.  Under  this  form  of 
contract  the  buyer,  or  seller  as  the  case  may  be,  has  the  right 
to  call  for  the  consummation  of  the  transaction  at  any  time  he 
chooses  within  the  limit  of  sixty  days. 

Immediately  after  a  transaction  has  been  made  between  two 
members  upon  the  floor  of  the  exchange  each  is  supposed  to  Jot 
down  a  synopsis  of  it  upon  a  small  pad,  which  he  carries  for 
the  purpose.  From  this  imperfect  record  the  entries  are  carried 
upon  the  books  of  the  members  and  afterwards  compared.  It 
is  very  seldom  that  a  member  disputes  his  liability  under  the  pad 
entry.  If  the  stock  is  not  delivered  as  per  agreement,  or  not 
paid  for  upon  delivery  offered,  the  matter  is  reported  to  the 
proper  officer  of  the  exchange,  who  buys  or  sells  the  stock  at  the 
market  price,  in  other  words  endeavors  to  carry  out  the  agree- 
ment of  the  member  who  is  in  default,  and  whatever  loss  is 


MARGINS.  897 

entailed  thereby,  or  whatever  the  difference  between  the  agreed 
price  and  the  market  price,  the  one  party  has  a  claim  against  the 
other  for  its  recovery.  Stocks  sold  "ex-dividend"  do  not  carry 
the  dividend  to  the  purchaser.  When  the  books  of  a  corporation 
are  closed  and  a  dividend  declared,  the  dividend  no  longer  goes 
with  the  stock,  but  just  prior  to  the  declaration  of  another  divi- 
dend, that  dividend  does  go  with  the  stock  unless  it  is  again  sold 
ex-dividend. 

As  previously  stated,  with  the  exception  of  purchases  made 
for  the  purposes  of  investment,  the  bulk  of  the  business  of 
buying  and  selling  stocks  and  bonds  is  done  upon  margins.  The 
buyer  does  not  pay  for  the  securities  in  full,  but  buys  them 

largely  upon  credit,  paying  probably  ten  or  twenty 
Margins  per  ccut.  of  their  value  to  the  broker  as  a  margin 

to  cover  any  possible  adverse  movement  of  the 
market.  The  broker  furnishes  the  capital  necessary  to  purchase 
the  securities  and  charges  his  customer  interest  upon  their  cost, 
over  and  above  the  amount  of  the  margin  in  his  hands.  Thus, 
suppose  A.  desires  to  buy  stocks  worth  $100,000.  He  deposits 
$10,000  with  his  broker,  together  with  instructions  to  buy  the 
specified  stock.  The  broker  is  merely  the  agent  of  the  cus- 
tomer and  must  carry  out  his  instructions.  The  broker  may 
advise  his  customer  as  to  the  best  course  to  pursue,  and  his 
advice  is  usually  valuable,  since  it  is  founded  upon  intimate 
association  with  the  stock  market,  but  the  customer  issues  the 
actual  orders  to  buy  or  sell.  The  broker  protects  himself  from 
loss  through  fluctuations  in  the  market  by  requiring  a  sufficient 
margin  to  be  deposited.  The  amount  of  the  margin  will  vary 
according  to  the  character  of  the  stock.  While  ten  per  cent, 
is  ample  margin  in  the  case  of  most  stocks,  a  larger  margin  may 
be  necessary  in  some  cases,  and  of  this  the  broker  is  the  judge. 
In  case  the  market  fluctuates  to  the  limit  of  the  margin,  the 
broker  calls  upon  the  customer  for  more  margins.  If  the  cus- 
tomer fails  to  respond,  the  broker  sells  the  stock  immediately  in 
order  to  save  himself  from  loss  by  a  still  further  fluctuation. 


399  THE  STOCK  EXCHANGE. 

Stocks  or  other  securities  purchased  by  a  broker  for  his  cus- 
tomer must  be  paid  for  on  delivery.  But  the  customer  has 
placed  only  a  margin  of  perhaps  10  per  cent,  of  the  cost  of  the 
securities  in  the  broker's  hands.  The  remainder  of  the  purchase 
money  the  broker  must,  and  does,  furnish.  Suppose  a  broker 
buys  1,000  shares  of  stock  at  120,  the  whole  amounting  to  $120,- 
000.  The  customer  has  deposited  $12,000  as  mar- 
tJn  of  Checks*  8^^'  '^^^  broker  must  furnish  the  remaining 
$108,000.  Brokers  are  not  rich  men,  and  even  if. 
they  were,  they  could  not  possibly  furnish  sufficient  capital  to 
buy  all  of  the  securities  which  a  large  brokerage  business  would 
require.  The  broker  arranges  with  his  bank  for  a  loan  large 
enough  to  supply  the  needed  funds,  the  securities  about  to  be 
purchased  to  be  deposited  as  collateral.  He  extends  credit  to  his 
customer  and  in  turn  gets  credit  from  his  bank.  He  extends  a 
credit  to  his  customer  equal  to,  say  90  per  cent,  of  the  cost  of 
the  stock,  and  the  bank  extends  a  credit  to  him  of,  say  80  per 
cent,  of  the  cost  of  the  stock.  Thus,  the  customer  furnishes 
$12,000  of  the  purchase  price,  the  broker  furnishes  $12,000  of 
his  own  capital,  and  the  bank  furnishes  the  remainder,  $96,000. 
But  the  securities  are  not  yet  delivered  to  the  buyer,  and  the 
condition  of  their  delivery  is  the  simultaneous  payment  of  the 
money.  The  matter  is  arranged  in  this  way:  The  broker  has 
an  understanding  with  his  banker  that  the  bank  will  over-certify 
his  check  temporarily.  After  certification  the  check  is  passed 
over  in  exchange  for  the  stock,  which  is  then  sent  to  the  bank 
as  collateral  for  a  loan  large  enough  to  make  the  account  good. 
It  is  true,  however,  that  banks  will  not  over-certify  checks  in 
this  way  unless  the  character  and  standing  of  the  broker  are 
such  as  to  warrant  implicit  confidence  in  him.  The  broker  must 
also  carry  a  constant  balance  in  the  bank  large  enough  to  entitle 
him  to  such  favors. 

It  will  thus  be  seen  that  over-certification  of  checks  is  an 
absolute  necessity  in  stock  transactions  under  the  custom  of  buy- 


OVER-CERTIFICATION  OF  CHECKS.  899 

ing  securities  on  credit  or  under  the  system  of  margins.  A 
clause  in  the  National  Bank  Act  forbids  the  over-certification  of 
checks  by  National  banks,  and  on  account  of  this  restriction 
(and  others)  Trust  Companies  and  private  banks  have  been  or- 
ganized in  considerable  numbers  to  meet  the  public  needs. 

Call  loans  are  a  feature  of  stock  trading,  and  are  extensively 
made  from  day  to  day,  subject  to  "sharp  call,"  which  means  that 
upon  notification  from  the  bank,  to  the  borrower,  such  loans 
shall  be  repaid  before  the  close  of  banking  hours  of  the  same 

business  day.  These  loans  are  secured  by  stock 
Call  Loans  Collateral,  and  when  stock  loans  are  terminated  by 

such  notification  the  debtor  is  very  likely  com- 
pelled to  borrow  other  money  in  the  open  market,  (which  tends 
to  advance  the  rate  of  interest  on  loans  upon  that  particular 
security)  or  to  sell  such  securities  in  the  open  market,  which  is 
apt  to  depress  its  market  price,  especially  if  it  should  become 
known  to  have  been  discredited  as  collateral  by  the  trust  com- 
panies. 

In  hundreds  of  offices  in  Chicago  and  other  cities  throughout 
the  country  may  be  seen  little  telegraphic  instruments  called 
"tickers,"  through  which  runs  a  narrow  paper  ribbon  on  which 

the  instrument  prints  automatically  the  names 
Tickers  and   priccs  of   stocks   and  bonds  in  abbreviated 

forms.  These  tickers,  together  with  the  service 
which  they  furnish,  are  rented  to  offices  by  the  Western  Union 
Telegraph  Company,  and  as  fast  as  sales  are  made  on  the  New 
York  Stock  Exchange  the  telegraph  conveys  the  information  to 
the  public  by  means  of  these  instruments.* 


*The  same  device  Is  used  for  the  produce  exchanges. 


THE    PRODUCE    EXCHANGE 


CHAPTER  XLIV. 

BOARD   OF   TRADE. 
CHARACTER;  ORGANIZATION;   MEMBERS;    BENEFITS  TO   PUBLIC. 

The  United  States  has  never,  thus  far,  been  a  great  manu- 
facturing country.  Its  commerce  and  wealth  are  chiefly  based 
upon  the  products  of  the  soil.  Its  mining  and  lumbering  in- 
terests have  been  small  compared  to  its  agriculture.  It  is  the 
great  food  producing  nation  of  the  world.  Eu- 
i^ur^^e'ltl"'^**  rope  is  directly  interested  in  the  success  of  agri- 
culture in  the  United  States  and  is  dependent 
largely  upon  American  produce.  The  development  of  agri- 
cultural interests  has  been  a  potent  factor  in  the  growth  and 
development  of  our  cities.  New  Orleans  became  the  greatest 
city  of  the  south  chiefly  because  the  products  of  the  cotton 
fields  found  their  natural  outlet  there.  Chicago  had  its  growth 
in  the  fact  that  it  is  the  center  of  a  vast  agricultural  domain. 
Buffalo  and  other  cities  of  the  lower  lakes  assumed  importance 
as  the  transportation  of  farm  products  by  water  to  New  England 
and  the  seaboard  became  a  necessity.  Later,  Galveston  in  the  far 
southwest,  Minneapolis  and  Duluth  in  the  northwest  sprang  up 
and  became  thriving  cities  because  they  were  natural  geograph- 
ical outlets  for  agricultural  products  of  the  expanding  and 
developing  west.  Agriculture  has  also  been  the  moving  in- 
centive to  the  building  of  railway  and  steamship  lines.  It 
was  to  meet  cargoes  from  the  Illinois  and  Iowa  prairies  that 
the  first  railroad  lines  were  pushed  westward  to  the  struggling 

400 


BOARD  OF  TRADE.  401 

trading  center  at   the  foot  of  Lake  Michigan, — afterwards  to 
become  the  greatest  grain  market  in  the  world. 

The  produce  exchange  is  an  outgrowth  of  our  agricultural 
development.  It  is  a  carefully  devised  business  system  for 
handling,  storing,  and  distributing  annually  millions  of  bushels 
of  grain  and  millions  of  dollars  worth  of  animal  products  in  the 

form  of  meats,  lard,  etc.,  at  important  points 
Definition  in  the  United  States.     It  is  a  grain  and  produce 

market,  the  creature  of  our  necessities  as  an  agri- 
cultural and  commercial  people.  It  differs  from  a  stock  ex- 
change in  that  its  members  deal  in  realities,  even  though  they 
handle  nothing  but  warehouse  receipts  or  promises  to  deliver, 
while  the  stock  broker  deals  in  the  evidences  of  credit,  or  securi- 
ties which  may  or  may  not  have  a  tangible  value  back  of  them. 

Produce  exchanges  are  usually  located  in  those  cities  which 
have  important  agricultural  sections,  tributary  to  them,  where 
railroads  center  or  where  rail  and  water  commerce  have  natural 

connections  at  a  navigable  port.  The  most  im- 
Location  portant  produce  exchanges  are  therefore   at  the 

seaboard,  on  the  lakes  or  on  navigable  rivers.  On 
the  Atlantic  coast  the  exchanges  are  at  Boston,  New  York, 
Philadelphia  and  Baltimore.  On  the  Gulf  of  Mexico  the  princi^ 
pal  exchange  points  are  New  Orleans  and  Galveston,  and  on  the 
great  lakes  are  Chicago,  Milwaukee,  Duluth,  Detroit,  Toledo 
and  Buffalo.  St.  Louis,  Kansas  City,  Cincinnati  and  Minneapo- 
lis are  examples  of  exchanges  in  close  touch  with  producing 
regions  but  not  having  advantages  of  lake  or  ocean  navigation. 
San  Francisco  is  the  most  representative  exchange  point  on  the 
Pacific  coast.  These  cities  furnish  the  natural  outlet  for  the 
distribution  of  the  products  of  their  several  sections. 

Each  exchange  is  a  corporation  controlled  by  a  general  or 
special  charter  under  which  its  acts  are  legalized  by  the  state 
in  which  it  is  located.  It  must  be  governed  by  certain  officials 
elected  from  and  by  its  members.     These  officials  are  usually  a 


403  PRODUCE  EXCHANCE. 

presiaent,  one  or  more  vice-presidents,  a  body  of  directors  and 
various  standing  committees  to  attend  to  the  details  of  official 
business.  Each  exchange  adopts  for  itself  rules  and 
the^Exchlnge"  bj-laws  which  govcm  both  officials  and  members 
in  all  their  acts.  These  rules  prescribe  the 
requirements  of  membership,  the  terms  and  conditions  under 
which  a  member  may  transact  business,  and  provide  rigid 
methods  of  discipline  for  violations  of  the  laws  of  the  exchange. 
It  must  be  kept  in  mind  that  the  exchange,  as  such,  transacts 
no  business — of  a  commercial  nature, — does  not  receive  or  ship, 
buy  or  sell  during  its  existence  a  bushel  of  grain  or  a  pound  of 
produce  of  any  kind.  It  simply  furnishes  the  facilities  for 
trading  to  its  members  and  so  hedges  them  about  with  restric- 
tions that  every  contract  made  is  binding  under  its  rules  and 
under  the  laws  of  the  state  and  nation.  Any  digression  from 
the  strict  letter  of  exchange  law  is  promptly  followed  by  a 
charge  of  uncommercial  conduct  and  this  by  suspension,  ex- 
pulsion or  other  penalty. 

The  members  of  an  exchange  may  be  divided  into  several 
classes  according  to  the  special  features  of  the  business  adopted. 
"Receivers"  are  those  who  make  a  business  of  receiving  grain 
or  other  produce  direct  from  the  country  shipper.  Their  busi- 
ness is  to  carry  out  the  instructions  of  the  ship- 
their^rivfieges  P®''  either  in  storing  the  grain  in  a  warehouse  or 
offering  it  for  sale  in  the  open  market  to  the 
elevator  owners  who  may  wish  to  carry  it  to  a  future  time,  to 
the  miller  who  may  want  wheat  to  grind,  to  the  distiller,  the 
brewer,  the  cereal  company  or  perhaps  the  eastern  shipper  or 
exporter.  "Shippers"  are  those  who  make  it  their  business 
to  arrange  for  the  forwarding  of  grain  to  still  other  exchange 
points  or  to  eastern  distributers  and  consumers.  "Carriers" 
give  special  attention  'to  financing  this  class  of  property  by 
supplying  the  necessary  capital,  furnishing  storage,  insurance 
and  all  needed  protection  until  there  is  a  demand  for  its  ship- 


MEMBERS'  PRIVILEGES.  408 

ment.  This  class  of  business  has.  given  rise  to  extensive  sys- 
tems of  private  elevators.  Public  warehousemen  are  those  who 
own  or  lease  from  railroads  great  storage  houses  the  contents 
of  which  they  generally  do  not  own.  They  are  required  to  issue 
warehouse  receipts  for  all  grain  stored  in  such  houses  and  the 
state,  through  a  board  of  warehouse  commissioners,  regulates 
the  storing,  carrying  and  delivery  of  this  grain  to  its  owners 
who  pay  a  fixed  charge  per  bushel  to  the  warehousemen  for  the 
warehouse  service. 

In  the  workings  of  the  Produce  Exchange  no  class  of  mem- 
bers occupy  so  prominent  a  place  as  Commission  Merchants.  As 
a  rule  they  outnumber  the  grain  receivers,  the  shippers,  the  ele- 
vator owners  and  the  independent  traders,  who  are  without  a 
commission  business.  Ordinarily  the  best  class  of  commission 
merchants  do  not  trade  on  their  own  account,  but  confine  them- 
selves to  the  proper  execution  of  customers'  orders.      For  the 

handling  of  a  trade  in  grain  there  is  established 
sionMeTc^ant       ^y  ^^^^  cxchaugc  a  regular  commission   charge, 

usually  Jc  a  bushel  for  opening  and  closing  the 
trade.  The  business  is  most  profitable,  when  conducted  on  a 
large  scale,  the  largest  houses  in  the  largest  markets  of  the 
country  frequently  executing  orders  for  many  millions  of  bush- 
els of  wheat,  corn  and  oats  in  a  day.  This  presupposes  a  very 
extensive  office  force,  a  big  private  wire  system  reaching  to 
other  exchange  points  and  a  wide  acquaintance  backed  by  a  most 
excellent  reputation  for  handling  all  orders  instantly  and  accu- 
rately. Where  a  few  houses  of  this  kind  exist  in  a  large  trading 
center  there  are  hundreds  of  smaller  concerns  doing  a  limited 
business,  but  under  the  same  rules  and  restrictions  of  the 
exchange.  The  first  province  of  the  commission  man  is  to  exe- 
cute orders  in  any  or  all  markets  on  the  exchange.  He  must 
know  his  customers,  or  the  people  who  entrust  him  with  orders. 
If  he  has  not  a  personal  acquaintance  with  his  principal,  (the 
man  giving  or  sending  the  order,)  he  must  have  what  is  the 


404  PRODUCE  EXCHANGE. 

equivalent  of  personal  acquaintance  and  confidence — a  financial 
guarantee  from  the  principal.  ,         ^ 

This  brings  up  the  subject  of  margins  or  security  on  trades 
ordered.  The  favored  commission  house  may  have  a  number  of 
customers  whose  financial  prominence  is  such  that  they  have 
carte  blanche  privileges  at  the  order  window.  In  such  cases  the 
commission  merchant  knows  that  whatever  is  bought  or  sold  for 
such  account  is  as  "good  as  gold"  without  the  scratch  of  a  pen. 
This  class  of  customers  is  the  exception.  For  the  ordinary 
trader  the  first  step  is  to  be  properly  presented  to  the  head  of  the 

commission  house  as  a  reputable  gentleman.  The 
Margins  secoud  rcquisitc  is  for  him  to  deposit  with  the 

house  such  sum  of  money  or  certified  checks  as 
will  cover  ordinary  obligations  in  the  trade.  Then  his  orders  to 
buy  or  sell  are  carried  out  by  the  machinery  of  the  fully  equipped 
commission  house.  If  his  orders  exceed  in  volume  the  credit  he 
has  with  the  house,  the  credit  clerk  is  quick  to  notify  him  that 
more  funds  are  needed.  The  rules  of  most  exchanges  permit 
the  commission  merchant,  if  any  unusual  action  is  taking  place 
in  the  market,  to  call  margins  on  trades  to  the  extent  of  ten  per 
cent,  of  the  ruling  value  or  price  of  the  article  bought  or  sold. 
As  an  example:  The  customer  has  wheat  bought  at  80  cents  for 
a  future  month.  Ten  per  cent,  of  this  price  is  8  cents.  The 
commission  man  if  he  fears  a  bad  break  in  the  market  may  ask 
the  trader  to  put  up  enough  funds  to  protect  the  trade  on  a 
break  of  8  cents  or  down  to  72  cents.  If  the  wheat  is  sold  at 
80  cents  and  the  market  looks  so  strong  that  it  may  make  a  big 
advance,  the  margin  is  called  the  other  way, — the  trader  putting 
up  the  funds  to  protect  the  house  on  a  possible  upturn  in  price 
to  88  cents.  When  the  market  has  covered  half  this  ground  a 
break  of  75  cents  or  an  advance  to  84  cents,  the  commission  man 
may  again  call  for  margins  to  the  full  limit  above  or  below  the 
ruling  price.  Thus,  on  a  very  excited  market  or  during  panicky 
conditions,  marq-in  calls  on  customers  mav  come  thick  and  fast. 


MARGINS.  406 

The  customer  may  feel  that  he  can  not  or  will  not  risk  more 
money  on  his  open  trades  and  orders  them  closed  at  a  loss.  If 
customers  do  not  respond  to  margin  calls  the  house  with  the 
open  lines  on  its  book,  may  close  the  same  for  account  of  those 
whose  margins  are  about  exhausted. 

These  are  extreme  cases.  The  ten  per  cent,  margin  call  is 
unusual.  In  the  ordinary  condition  of  trade  from  2  cents  to  5 
cents  a  bushel  protection  is  considered  sufficient  by  the  commis- 
sion merchant.  Naturally  there  are  times  when  the  customer 
can  not  be  reached  quickly  or  for  some  reason  can  not  respond 
quickly  enough  and  the  commission  house  is  caught  in  the  gap 
between  the  wicked  market  and  the  tardy  principal. 

Many  students  of  business  methods  are  apt  to  conclude  that 
all  transactions  on  an  exchange  are  surrounded  by  some  unex- 
plainable  mystery.  They  readily  understand  that  conditions 
such  as  drought,  frost,  excessive  rain,  etc.,  affect  the  year's 
output  of  produce,  and  the  whole  problem  of 
Trade  News  °°  grain  speculation  is  made  up  of  factors  as  plain 
and  simple.  The  speculator  watches  the  crops  of 
the  world  the  year  through.  If  the  winter  crops  go  into  the 
ground  in  good  shape  it  is  the  first  promise  of  abundance  for 
the  coming  year.  If  spring  crops  are  seeded  favorably  and  a 
large  corn  acreage  is  planted  the  probability  of  abundance  in- 
creases. Everything  else  left  out  of  the  question,  this  farm 
prosperity  starts  the  speculator  selling  months  ahead.  If  the 
opposite  is  true — adverse  seeding  seasons,  winter  killing  of  wheat 
and  wet  weather  delay  in  corn  planting — the  speculator  begins 
buying  on  the  theory  of  short  supplies  and  naturally  higher 
prices.  Extend  this  system  of  observation  so  that  it  covers 
the  importing  countries  of  Europe — chiefly  England,  France 
and  Germany — and  the  competitors  of  America  in  exporting 
supplies  to  Europe — chiefly  Russia,  Danubian  countries,  India, 
Australia  and  Argentina — and  you  will  find  the  commercial 
reason  for  ninety  per  cent,  of  the  trading  done  on  future  con- 


406  PRODUCE  EXCHANGE. 

tracts.  If  importing  and  exporting  lands  are  promised  short 
crops  then  very  high  prices  for  twelve  months  ahead  are  almost 
certain.  If  both  importing  and  exporting  countries  have  an 
over  abundance  promised,  prices  are  likely  to  be  depressed. 
The  speculator  also  takes  into  account  the  reserves  on  hand  from 
the  previous  year.  This  is  important  whether  these  reserve 
stocks  are  at  home  or  abroad.  Weather  conditions  are  watched 
every  day  of  the  year.  Great  crop  promise  may  be  changed  in 
a  night  by  a  hard  untimely  frost,  by  hot  winds,  by  excessive 
rains  at  harvest  or  by  a  widespread  drought  during  the  growing 
period.  The  perfection  of  the  signal  service  and  the  weekly 
and  monthly  weather  and  crop  reports  furnished  all  exchanges 
by  the  agricultural  department  at  Washington  have  become  more 
and  more  an  aid  to  the  trade  in  shaping  prices  according  to 
natural  conditions. 

In  a  general  way  the  Produce  Exchange  is  a  benefit  to  both 
producer  and  consumer.      The  first  great  benefit  is  in  the  ac- 
curacy with  which  the  organized  trade  gathers  and  makes  public 
valuable  information  about  production  the  world 

Benefits  of  the  T)    xi,  j  j 

Exchanges  oYeT.    Both  producer  and  consumer  can  more  in- 

telligently prepare  for  the  future — the  one  by  sell- 
ing quickly  or  holding  on  to  his  year's  production  as  the  con- 
ditions suggest,  the  other  by  making  his  contracts  early  for 
supplies  or  by  holding  off  for  lower  prices  as  his  judgment 
might  direct.  In  the  event  of  poor  production  at  home  the 
speculator  is  the  best  friend  of  the  farmer.  Long  before  the 
grain  approaches  harvest  and  perhaps  months  before  the  great 
American  corn  yield  is  to  be  gathered,  the  traders  who  watch 
every  feature  of  crop  development  have  advanced  prices  to  a 
high  level  and  the  man  who  owns  the  acres  is  the  first  to  feel 
the  benefits.  He  may  have  less  bushels  to  market  but  his 
crop  loss  is  to  a  large  extent  made  good  by  the  markets  made 
possible  only  by  the  Produce  Exchange  as  here  outlined. 


CHAPTEK  XLV. 

THE   PRODUCE  EXCHANGE— Continued. 

CASH  GRAIN;  FUTURES;  INSPECTION;  BUCKET  SHOPS. 

Although  about  ninety  per  cent,  of  the  contracts  made  on 
any  exchange  are  in  "futures"  there  must  always  be  the  very  im- 
portant basis  of  cash  business.  Without  the  actual  property 
the  contracts  for  future  delivery  would  mean  nothing  and  would 
have  no  standing  in  law.  The  main  fea- 
Tradin"^**"  turcs    of    cash    trading    will    therefore    be    con- 

sidered first.  A  good  portion  of  the  trad- 
ing hall  is  generally  given  to  what  are  termed  cash  grain  sample 
tables.  The  grain  house  with  a  certain  number  of  cars  of 
wheat,  corn,  oats,  rye,  barley  or  flax  seed  on  the  railroad  tracks 
for  its  disposal  hastens  to  have  samples  of  the  same  displayed 
on  these  tables.  The  samples  are  in  small  paper  sacks,  the 
contents  of  which  have  been  taken  from  the  cars  when  they 
were  inspected  on  arrival.  Each  sack  contains  the  name  of  the 
railroad  line  over  which  it  was  received,  number  of  the  car,  the 
grade  affixed  by  the  official  inspector,  etc.  When  the  samples 
are  placed  on  the  tables  the  grain  is  on  the  market.  Around 
these  sample  tables  gather  the  receivers  who  have  grain  to  sell 
and  buyers  of  all  classes  who  wish  to  secure  a  share  of  the  current 
receipts  from  the  country.  As  suggested  before,  these  buyers 
may  include:  First,  elevator  owners  who  want  the  grain  to 
fill  their  houses  for  the  profits  in  the  storage;  second,  the  millers 
or  their  agents  buying  wheat  to  grind;  third,  brewers  and  dis- 
tillers who  wish  corn  or  barley  for  manufacturing  purposes; 
fourth,  the  agent  of  the  cereal  company  who  wants  oats  for  his 
plant;  fifth,  the  shippers  who  have  need  of  grain  of  all  kinds  to 
fill  contracts  made  with  eastern  distributers,  with  actual  con- 

407 


408  PRODUCE  EXCHANGE. 

sumers  or  with  export  interests  contracting  for  supplies  needed 
abroad. 

When  the  seller  and  buyer  agree  on  a  price  for  a  single  car 
of  grain  or  for  fifty  cars,  as  the  case  may  be,  the  sample  bag 
passes  to  the  buyer.  He  can  then  direct  the  railroad  having 
the  cars  on  its  tracks  how  to  dispose  of  them.  They  may  be 
ordered  to  a  certain  warehouse  or  mill  or  other 
to  e'uylr  ^^^^^^  plant  to  be  unloaded  or  they  may  be  ordered 
switched  to  the  tracks  of  some  other  road  to  be 
forwarded  to  the  point  for  which  the  grain  was  purchased. 
These  transactions  repeated  on  each  trading  day  of  the  year 
constitute  the  chief  feature  of  the  cash  grain  trade. 

Another  important  feature  in  the  cash  grain  business  is  the 
delivery  of  grain  in  either  private  or  public  warehouses.  Sales 
may  be  effected  from  private  houses  by  samples  or  from  public 
warehouses  by  the  tender  of  the  official  receipt  or  certificate 
representing  the  grain  when  it  went  int©  storage.  Usually  sales 
made  from  storage  houses  are  for  larger  amounts — possibly  only 
25,000  bu.,  if  some  special  lot  of  grain  is  desired — ^but  more 
frequently  50,000,  100,000  or  250,000  bushels  where  the  grain 
is  to  be  moved  out  by  rail  or  water  in  large  quantities.  In  all 
these  transactions  the  bill  of  lading,  the  certificate  of  the  public 
weighmaster,  and  the  official  inspection  certificate  pass  with  the 
grain  to  the  buyer  who  gives  in  exchange  his  check  in  full  pay- 
ment.   This  closes  the  cash  grain  transaction. 

That  part  of  the  business  of  the  Produce  Exchange  which  re- 
ceives most  notice  by  the  press  and  the  public  is  known  as 
"trading  in  futures'^  or  speculation.  Unreasonable  critics  of  the 
system  go  so  far  as  to  call  this  feature  of  the  business  gambling. 
This  phase  of  criticism  was  discussed  in  a  previous  chapter  on 
the  Stock  Exchange,  which  furnishes  a  parallel  case. 

Each  member  of  a  Produce  Exchange  can  do  business  on  his 
own  account  or  he  may  execute  orders  for  others  inside  or  out- 
side the  association.     If  he. operates  for  others  he  does  so  on  a 


CASH  GRAIN.  409 

commission  prescribed  by  the  rules.     He  must  in  making  a  re- 
port of  his  trades  to  his  principal  state  in  certain  written  form 
with  whom  he  made  the  trade  in  the  open  market, 
Futures*"  *^®  ^^^®  ^^   which  it  was  made   and   the  price. 

If  a  member  acting  as  a  broker  for  a  fellow 
member  or  as  a  commission  merchant  for  an  outsider  makes 
ten  or  twenty  or  two  hundred  trades  in  a  day  the  same  exacting 
conditions  attach  to  each  separate  transaction.  It  is  the  growth 
of  such  business  that  builds  up,  first  the  small  commission  firm 
and  possibly,  later,  the  great  grain  and  banking  house  with 
private  wires  stretching  out  to  other  exchange  points  and  pene- 
trating into  the  states  tributary  to  the  home  exchange. 

The  trader  who  sees  in  existing  conditions  on  a  certain  day 
reasons  for  higher  prices  and  operates  with  a  view  of  advancing 
the  market  is  called  "a  bull."  The  trader  who  does  the  oppo- 
site is  called  a  "bear."  The  entire  trading  body  as  well  as  the 
public,  so  far  as  it  takes  any  part  in  the  making  of  the  market, 
is  thus  divided  into  bulls  and  bears  as  on  a  stock  or 
Bulls  and  Bears  cotton  exchange.  If  a  man  with  money  to  in- 
vest or  risk  in  a  business  transaction  buys  a  vacant 
lot  in  a  suburb  and  sells  it  a  month  or  a  year  later  at  a  certain 
advance  or  a  certain  loss  he  has  engaged  in  what  the  trade  and 
the  public  call  speculation. 

It  is  a  simple  matter  to  apply  the  same  attempt  at  profit 
making  to  the  products  of  the  soil.  The  grain  trader  goes  into 
the  open  market  where  he  meets  hundreds  of  others  and  makes 
trades — makes  contracts  for  future  delivery — under  the  fixed 
rules  of  the  exchange — in  grain.  He  buys  in  midwinter  or 
early  spring  on  May  contracts  or  in  the  summer  or  fall  on 
September  or  December  contracts.  While  he  is 
its  Details " '"  doiug  this  auothcr  member  has  made  a  sale  of  a 
certain  quantity  of  a  specified  kind  of  grain  to  be 
delivered  in  May,  July,  September  or  any  other  month.  Long 
before  the  month  named  arrives,  the  man  who  had  the  grain 


410  PRODUCE  EXCHANGE. 

bought — finding  himself  with  a  profit  of  several  cents,  goes  into 
the  same  open  market  and  sells  out  a  like  amount.  The  mem- 
ber who  sold  originally  finds  the  market  several  cents  against 
him.  He  goes  into  the  market  and  buys  a  like  amount.  The 
one  draws  down  profits  from  the  clearing  house.  The  other 
puts  his  check  into  the  clearing  house  to  make  good  his  losses. 
Both  are  even  on  the  market.  Both  have  engaged  in  speculation 
in  its  simplest  form. 

Assume  that  the  original  trades  stood  on  the  books  without 
any  offsetting  transactions  until  "delivery  day,"  the  last  day  of 
the  month  named  in  the  contracts.  Then  at  that  date,  under 
the  rules,  the  buyer  must  be  in  a  position  to  take  the  5,000, 
10,000  or  50,000  bushels  named  in  the  contract  and  pay  for  them. 
He  then  has  to  deal  with  cash  property  and  he 
Delivery  Day  has  tumcd  over  to  him  warehouse  certificates  call- 
ing for  the  actual  property  for  which  he  must 
draw  his  check  in  settlement.  The  original  seller,  on  the  other 
hand,  may  tender  the  amount  of  grain  named  on  "delivery  day" 
or  he  can  deliver  the  same  at  fixed  hours  on  any  trading  day  of 
the  month  named  in  the  contract. 

The  member  or  house  which  for  his  own  account  or  on 
orders  from  a  principal  continues  to  buy  certain  cereal  for 
some  future  month  on  a  large  scale  for  weeks  or  months  in  ad- 
vance becomes  a  factor  in  the  market  to  the  extent  perhaps  of 
causing  a  marked  upturn  in  the  price.  Those  who  have  thus 
bought  are  termed  in  the  principal  "longs"  or  holders  in  that 
particular  cereal  on  that  exchange.  Those  who  have  sold  to 
this  large  buyer  or  to  others,  day  after  day  are  termed  ^^shorts." 
These  latter  may  find  the  market  going  too  much 
shofts^"**  against  them  and  through  fear   of  heavy  losses 

may  switch  suddenly  to  the  buying  side  for  pro- 
tection. This  is  called  "covering,"  a  performance  which  often 
adds  great  force  to  the  buying  side  and  results  in  a  sharp  ad- 
vance in  the  price  for  the  time  being.      On  such  a  swell  in  the 


LONGS  AND  SHORTS.  411 

price  the  large  holders  may  reduce  their  lines  at  good  profits 
or  may  continue  to  buy  up  to  delivery  day  when  they  can  demand 
the  actual  property.  This  condition  may  be  reversed.  The 
holder  may  find  the  market  each  day  going  against  him.  The 
sellers  may  grow  bold,  pressing  the  market  lower  until  the  longs 
are  forced  to  abandon  their  position.  If  they  sell  out  to  prevent 
further  losses  it  is  called  forced  liquidation — ^just  the  opposite 
of  covering  by  shorts.  The  short  sellers,  with  a  decided  ad- 
vantage in  the  market  because  of  the  decline,  may  buy  back 
to  offset  previous  sales  or  may  continue  short  until  delivery 
day  when  they  are  obliged  under  the  rules  to  produce  the 
property  sold — having  the  entire  month  to  make  the  delivery. 
This  kind  of  trading  gives  rise  to  all  the  turns  in  prices  in  a 
speculative  market.  ^Yhen  carried  to  extremes  it  gives  rise 
to  violent  fluctuations  in  prices  by  which  smaller  or  more  con- 
servative traders  are  greatly  inconvenienced  and  often  finan- 
cially injured. 

Following  up  the  foregoing  methods  of  trading  a  "corner" 
develops  under  certain  conditions.  A  strong  house  or  a  group 
of  leaders  in  the  trade  may  decide  that  the  wheat,  corn  or  oats 
market  is  in  a  condition  to  be  easily  controlled  and  the  price 
manipulated.  The  shipping  demand  for  a  certain  cereal  has 
reduced  stocks.  The  country  roads  are  bad  or  farmers  too 
busy  to  market  grain  freely.  Perhaps  some  injury  threatens 
the  growing  crop  and  makes  the  country  unwilling  to  part  with 
reserves.  If  the  warehouses  contain  but  2,000,000  bushels  of 
the  grade  required  to  fill  contracts  and  the  man  who  contem- 
plates running  a  corner  sees  that  another  ^,000,000  bushels  is 

all  the  country  tributary  to  the  market  is  likely 
Corner  to   fumish,   evcu  with  the  inducement  of  high 

prices,  then  his  plan  is  to  keep  on  buying  until 
he  has  accumulated  a  line  of  about  10,000,000  bushels.  Of  this 
amount  the  sellers  of  4,000,000  bushels  will  have  the  actual 
grain  from  the  country  and  from  the  elevators  to  deliver  when 


412  PRODUCE  EXCHANGE. 

the  month  for  which  it  is  sold  arrives.  The  sellers  of  the  other 
6,000,000  bushels  are  caught  "short."  They  have  sold  what 
they  can  by  no  means  deliver.  If  these  shorts  take  alarm  and 
rush  into  the  open  market  to  buy  or  "cover"  for  protection  then 
the  excitement  begins.  Prices  may  be  advanced  several  cents 
in  a  single  day.  After  prices  are  thus  carried  far  above  a 
natural  level  others  of  the  short  sellers  may  seek  to  make  private 
settlements  on  large  lines  outside  of  the  regular  trading  channels. 
There  is  a  third  and  last  resort  for  those  who  sell  and  can  not 
deliver.  They  can  default  on  their  contracts  and  ask  an  arbitra- 
tion committee  to  fix  a  fair  settlement  price.  It  should  be 
stated  here  that  the  laws  of  many  states  make  the  running  of 
such  a  corner  illegal.  On  nearly  all  exchanges,  also,  there  is  legis- 
lation against  such  operations.  As  a  rule  the  man  conducting  a 
deal  of  this  kind  is  fortunate  to  escape  losses  in  the  end  as  he 
has  delivered  to  him  such  a  volume  of  high  priced  grain  that  he 
may  not  be  able  to  distribute  and  market  it  until  the  expense  of 
storing,  insuring  and  carrying  the  grain  will  offset  the  profits 
he  may  have  secured  in  his  settlement  with  the  short  sellers. 

One  of  the  most  important  features  of  the  exchange,  under- 
lying both  the  cash  grain  trade  and  the  transactions  in  futures 
is  the  matter  of  grain  inspection.  After  the  grain  leaves  the 
farm  and  is  thrown  upon  the  open  market  at  an  exchange 
point  it  becomes  an  element  in  the  commerce  of  the  world. 
Banks  make  loans  on  grain  in  transit  and  in  store. 
,  ^^^^  ,.  It  must   carry  insurance  in   most   of   its  travels 

Inspection 

from  producer  to  consumer.  Somebody  must 
vouch  for  it.  The  man  who  goes  around  the  world  needs 
personal  words  of  introduction  and  letters  of  credit.  Grain — the 
chief  product  of  American  farms — must  start  on  its  way  in  the 
world  of  trade  with  a  certificate  to  show  its  quality.  Grain 
inspection  is  conducted  not  by  the  exchange  but  by  the  state 
in  which  the  exchange  is  located.  Thus,  Missouri  regulates 
inspection  for  St.  Louis,  Minnesota  for  Minneapolis  and  Illinois 


GRAIN  INSPECTION.  413 

for  Chicago.  The  governor  of  the  state  appoints  a  Chief 
Grain  Inspector.  This  same  official  aided  by  a  board  of  Rail- 
road and  Warehouse  Commissioners  appoints  a  Supervising  In- 
spector and  as  many  assistants  as  the  size  of  the  railroad  center 
and  the  volume  of  grain  handled  suggest.  These  assistants 
visit  the  railroad  yards  daily  and  by  extracting  samples  from  the 
interior  of  the  cars  of  grain  fix  upon  its  proper  grade.  These 
grades  usually  range  from  No.  1  to  No.  4  and  below  this  it  is 
classed  as  no  grade  or  rejected.  It  is  with  the  higher  grade 
the  greatest  care  is  needed.  Most  exchanges  specify  that  con- 
tracts may  be  filled  with  No.  1  or  No.  2  grain.  If  the  state  does 
its  work  well  other  exchanges  and  grain  merchants  the  world 
over  learn  to  accept  its  certificate  of  inspection  without  ques- 
tion. The  state  not  only  inspects  grain  as  it  is  received,  and 
before  the  samples  are  offered  on  the  exchange,  but  it  places  in- 
spectors at  warehouses  to  certify  to  quality  of  cargoes  withdrawn 
from  store  for  shipment  by  boat  or  rail  to  their  destination.  Mil- 
lions of  bushels  of  grain  are  sold  every  month  in  the  year  to 
European  buyers  who  rely  on  the  grade  given  the  grain  at  the 
American  exchange  point  by  the  state  inspectors. 

At  times  when  sellers  are  making  heroic  efforts  to  rush  grain 
to  market  to  fill  large  contracts  it  is  often  of  the  greatest  im- 
portance to  have  the  receipts  gradfe  No.  2  instead  of  No.  3.    The 

one  certificate  will  make  it  deliverable  on  a  con- 
Grade^"**  tract  made  on  the  exchange,  the  other  will  not. 

Growing  out  of  this  emergency,  in  attempting  to 
make  grain  good  on  contracts,  there  has  grown  up  at  each  ex- 
change point. a  system  of  private  elevators  equipped  with  ma- 
chinery for  cleaning  and  drying  grain  to  raise  its  grade.  It  is  then 
passed  to  a  public  elevator,  is  again  inspected  and  may  be  deliv- 
ered on  contracts.  What  is  known  as  "kiln  dried"  corn  is  very 
desirable  in  commercial  circles  at  certain  months  in  the  year — 
especially  the  germinating  season — when  corn  containing 
moisture  cannot  be  shipped  long  distances  without  heating  or 
sprouting. 


414  PRODUCE  EXCHANGE. 

Before  concluding  this  discussion  of  the  Produce  Exchange 
it  may  be  proper  to  refer  to  a  species  of  gambling  conducted 
under  the  semblance  of  grain  trading,  and  known  as  the  oper- 
ation of  "bucket  shops." 

The  bucket  shop  is  an  imitation  of  the  commission  house. 
The  one  is  an  outlaw  in  most  states  in  this  country,  the  other 
as  legitimate  as  filling  of  orders  for  coal,  lumber  or  merchandise. 
The  commission  house  fills  orders  entrusted  to  it  in  the  open 
market,  where  every  purchase  or  sale  has  its  effect  in  making  the 
prices,  on  which  producers  sell  their  crops  and  consumers  both, 
domestic  and  foreign  base  their  purchases.  Every  sale  contem- 
plates delivery  and  every  purchase  contemplates  the  ability  of 
the  buyer  to  take  the  actual  property  on  delivery 
Bucket  Shops  day.  Bucket  shops  generally  secure  their  quota- 
tions, (which  they  mark  up  on  a  black-board,) 
from  the  exchange  by  trickery.  They  never  create  a  quotation, 
except  it  be  a  false  one  to  get  the  best  of  an  innocent  customer. 
The  bucket  shop  system  is  to  take  the  wagers  of  its  victims  on 
the  next  turn  in  the  regular  market,  the  money  passing  over  the 
desk  as  if  betting  on  a  horse  race.  Most  trades  are  made  on  1 
cent  a  bushel  margin  and  the  bucket  shop  deducts  its  |c  or  Jc 
a  bushel  from  the  price  when  the  outsider  makes  his  bet.  It  is 
a  gamble  pure  and  simple  on  what  the  market  is  about  to  do. 
No  bucket  shop  ever  controls  a  bushel  of  grain,  ever  makes  a 
delivery  or  fills  an  order  in  the  open  market  unless  for  protectiou. 
Nearly  all  the  highest  state  courts  and  the  United  States  Su- 
preme Court  have  ruled  in  test  cases  that  regular  exchange 
methods  are  proper  commercial  transactions  while  the  bucket 
shop  is  declared  an  evil. 


STORAGE    AND    WAREHOUSING. 


CHAPTER  XLVI. 

BONDED,  PRIVATE  AND  COLD  STORAGE  WAREHOUSES. 

IMPORTATION    OP    GOODS;     CLASSES    OF    BONDED    WAREHOUSES; 
RESTRICTIONS;    COLD  STORAGE  SYSTEM. 

It  is  frequently  not  convenient  for  an  importer  to  pay  the 
duty  upon  an  invoice  of  foreign  goods  immediately  upon  their 
arrival.  He  may  have  imported  the  goods  to  meet  a  demand 
several  months  later.  He  imports  the  goods  when  he  can  get 
them  or  when  he  can  buy  them  to  advantage,  and  holds  them 
until  the  demand  for  them  arises.  Many  foreign 
warlhouses  articles,  such  as  the  laces  of  Switzerland  or  the 
rugs  of  Persia  are  made  in  the  cottages  or  homes 
of  the  people.  These  are  bought  up  by  middlemen  who  go  about 
collecting  them,  brought  down  to  the  seaport  and  there  disposed 
of  to  American  buyers  who  purchase  for  our  market.  Such 
purchases  must  be  shipped  to  America  at  once.  Even  in  coun- 
tries where  the  factory  system  prevails  it  is  often  necessary  for 
our  merchants  to  place  their  orders  far  in  advance  of  the  demand. 
This  of  necessity  requires  large  capital,  and  as  the  duty  is  a  con- 
siderable item,  it  is  a  great  convenience  to  merchants  to  be  able 
to  leave  the  goods  in  the  hands  of  the  Government  without  pay- 
ment of  the  duty  until  they  are  needed  for  sale. 

A  bonded  warehouse  is  one  designed  especially  for  the  stor- 
age of  imported  goods  awaiting  payment  of  the  duty  by  the 
importer.  Such  warehouses  are  frequently  owned  by  private  in- 
dividuals, but  are  constructed  under  the  supervision  of  the  Gov- 

415 


41«  STORAGE  AND  WAREHOUSING. 

eminent  and  are  fire-proof.  They  are  under  the  absolute  control 
of  the  Government  and  are  isolated  from  other  buildings.  A 
Government  officer  known  as  storekeeper  is  in  charge  of  each 

warehouse.  He  is  held  responsible  for  the  records 
Storekeeper  and  safc-keepiug  of  the  contents.    No  goods  can  be 

delivered  from  the  warehouse  without  a  written 
permit  from  the  Collector  of  the  port,  which  must  be  presented 
to  the  store-keeper.  He  checks  all  goods  into  the  warehouse, 
and  when  a  permit  for  delivery  is  presented,  he  checks  out  the 
goods  needed  by  the  importer.  Goods  may  be  left  in  a  bonded 
warehouse  three  years  without  payment  of  duty. 

Bonded  warehouses  are,  for  convenience,  divided  into  several 
classes.  Class  1  consists  of  warehouses  owned  or  leased  by  the 
Government  and  are  known  as  General  Order  Stores.  This  class 
is  the  receptacle  for  all  unclaimed,  abandoned  or  seized  merchan- 
dise, the  owners  of  which  have  not  complied  with  the  law.     Class 

2  is  for  the  special  and  exclusive  use  of  the  firm  or  corporation 

owning  it.  It  is  usually  located  near  the  business 
Classes  housc  of  the  firm,  and  contains  no  goods  except 

theirs.  It  is  in  charge  of  a  government  store- 
keeper and  subject  to  the  same  restrictions  as  other  warehouses. 
Its  entrances  and  exits  are  separated  and  its  keys  are  held  by  the 
store-keeper  who  checks  the  receipt  and  delivery  of  goods.     Class 

3  is  for  the  general  storage  of  goods  in  bond.  Any  importer  can 
store  his  goods  in  Class  3  warehouse. 

When  the  goods  are  landed  at  a  port  of  entry  the  merchant 
to  whom  they  are  consigned  gets  notice  of  their  arrival,  and  if 
he  does  not  desire  them  for  immediate  consumption  he  enters  the 
goods  for  the  bonded  warehouse,  or  if  they  are  in  a  warehouse  at 
some  port,  he  enters  them  for  re-warehousing,  gets  a  permit  to 

transport  them  to  the  warehouse  near  to  his  busi- 
Goodr°*  ^^^^  home,  and  without  paying  duty  transports 

them  to  his  home  port  and  places  them  in  a  bonded 
warehouse,  almost  as  convenient  to  him  as  his  own  store,  and 


MANUFACTURING  BONDED  WAREHOUSES.  417 

there  he  may  allow  them  to  remain  until  his  customers  call  for 
them.  When  the  goods  are  received  at  the  bonded  warehouse 
the  storekeeper  inspects  the  condition  of  the  packages,  opens  an 
account  with  that  merchant  and  enters  the  number  of  the  bond 
on  his  book  with  the  number  of  cases  and  marks  on  the  same,  to 
await  the  pleasure  or  wants  of  the  owner. 

A  merchant  may  withdraw  a  portion  of  an  importation  by 
paying  the  duties  upon  the  goods  covered  by  that  consular  in- 
voice. Usually  merchants  have  their  foreign  or- 
rportion^**  °  ^^^^  made  up  into  convenient  consular  invoice 
quantities,  so  that  in  case  it  is  desired  to  withdraw 
a  special  class  of  goods,  it  is  not  necessary  to  pay  the  duties  on  a 
large  quantity  of  other  goods.  All  goods  not  withdrawn  from  the 
bonded  warehouse  in  the  three  years,  are  considered  abandoned, 
and  are  sold  at  public  sale. 

An  American  manufacturer  may  bond  his  factory  to  the  Gov- 
ernment* so  that  it  will  be  possible  for  him  to  import  raw  mater- 
Manufacturing  ^^^^'  manufacture  them  into  a  finished  product,  and 
Bonded  ship  this  to  a  foreign  country  without  the  payment 

are  ouses  ^£  ^^^  ^^^^^  upon  the  raw  material.  His  factory 
would  then  be  called  a  manufacturing  bonded  warehouse,  and 
would  be  subject  to  the  same  regulations  as  other  bonded  ware- 
houses.t 

PRIVATE    WAREHOUSES. 

Ordinary  warehouses  are  denominated  free,  or  private,  to 
distinguish  them  from  bonded  warehouses.  The  Government 
has  no  control  over  them.  They  are  for  general  storage  pur- 
poses, or  for  that  of  imported  goods  on  which  the  duties  have 
been  paid.     Manufacturers  frequently  have  occasion  to  store  up 

*He  may  furnish  the  Government  with  a  bond  as  security,  and  submit  to 
the  regulations. 

fA  manufacturer  may  pay  the  duty  on  raw  material  imported,  mann- 
facture  it  into  a  finished  product,  ship  this  to  a  foreign  marljet  and  receive  a 
refund  of  the  duty  paid  on  the  raw  material,  under  certain  restrictions. 
This  refund  Is  called  a  "draw  back." 


418  STORAGE  AND  WAREHOUSING. 

their  products  to  meet  the  demands  of  the  season  when  such 
goods  are  salable.  Wholesale  houses  frequently  carry  in  ad- 
dition to  their  regular  stock,  large  quantities  of 
wJrehou^sM**  merchandise  in  store,  especially  when  confident  of 
a  rise  in  price.  Goods  seized  under  writs  of  replevin 
or  attachment  are  stored  awaiting  judicial  sale.  Furniture  and 
valuables  are  stored  awaiting  shipment  or  use,  etc.  Free  or 
private  warehouses  are  owned  and  conducted  by  private  individ- 
uals as  a  business.  The  rates  are  less  than  in  bonded  ware- 
houses, as  the  business  is  free  from  Government  restrictions,  and 
are  based  generally  upon  the  space  occupied  in  cubic  feet.  The 
warehouse  receipt  given  by  a  private  warehouseman  is  an  assign- 
able instrument  and  may  be  used  at  the  bank  as  collateral  secur- 
ity for  money  borrowed,  or  in  many  instances  warehousemen 
make  advances  to  the  extent  of  one-half  or  three-fourths  of  the 
value  of  the  property  stored,  charging  interest  at  ruling  rates. 
Perishable  goods,  of  course,  do  not  find  their  way  into  bonded 
or  private  warehouses.     They  are  placed  in  cold  storage. 

COLD  STORAGE  WAREHOUSES. 

Out  of  the  development  of  our  modern  domestic  and  foreign 
commerce  and  transportation  systems  has  come  the  cold  storage 
warehouse.  By  means  of  cold  storage  the  preservation  through- 
out the  entire  year,  of  meats,  fruits,  poultry,  dairy  products,  fish 
and  vegetables  has  been  accomplished  to  such  an  extent  that  the 

seasons  have  become  practically  eliminated,  and 
Cold  storage         the  priccs  of  thcsc  neccssarics  of  life  have  been 

made  uniform.  In  the  season  of  abundance,  in- 
stead of  becoming  a  glut  on  the  market,  these  products  are  placed 
in  cold  storage  and  preserved  until  trade  conditions  will  warrant 
placing  them  on  the  market.  Cold  storage  warehouses  are  con- 
structed w^ith  specially  built  walls  of  great  thickness,  containing 
insulating  material  such  as  asbestos,  cork,  charcoal,  shavings, 
etc.,  and  every  precaution  is  taken  against  the  admission  of  out- 


COLD  STORAGE.  419 

side  heat.  Formerly  cold  storage  products  brought  a  lower  price 
in  the  market  than  those  that  were  fresh,  but  under  improved 
cold  storage  methods  they  now  bring  as  high  a  price  in  the 
market  and  in  some  instances  even  higher.  Eggs  stored  in 
March  and  taken  out  in  November,  sell  as  high  as  the  fresh  com- 
modity. Eggs  have  been  kept  two  years  and  found  perfectly 
sweet  when  used.  Five  or  six  months  is  the  usual  period  of 
storage  with  most  products. 

It  is  estimated  by  a  reliable  authority  that  products  worth 
over  $500,000,000  are  placed  in  cold  storage  annually,  in  the 
United  States.  Thousands  of  tons  of  meat  are  stored  for  pres- 
ervation awaiting  distribution;  between  three  and 
United  state'L  ^^^  million  cases  of  eggs  find  their  way  into  the 
cold  stores  each  season;  between  one  and  one-half 
and  two  million  60-lb.  tubs  of  butter,  besides  large  amounts  of 
oleomargarine,  are  stored;  some  two  to  three  million  barrels  of 
apples  are  put  in  the  cold  rooms  each  fall,  as  well  as  great 
quantities  of  other  produce,  including  vegetables  of  all  kinds, 
molasses,  tobacco,  silks,  furs,  upholstered  furniture,  etc.* 

The  greatest  center  of  the  cold  storage  industry  up  to  1902 
was  Chicago,  it  having  long  been  the  greatest  railroad  center 
and  center  of  supplies,  and,  being  the  first  to  engage  extensively 
in  the  cold  storage  of  eggs,  became  the  egg  center  of  the  country, 
more  than  600,000  cases  of  30  dozens  each  finding 
Celfte^*°^*^*  their  way  into  the  Chicago  coolers  each  spring. 
The  greatest  center,  if  Jersey  City  and  Newark, 
N.  J.,  are  included,  is  New  York,  partly  because  of  the  vast  local 
market  and  also  because  of  her  great  export  and  import  trade  in 
perishable  goods. 

Fish  freezing  and  storing  warehouses  are  now  found  in  all 
parts  of  the  United  States,  including  Alaska,  as  well  as  Canada 


*These  latter  articles  are  placed  in  cold  storage  to  protect  them  from 
Insects.  The  leading  retail  dry  goods  houses  In  our  large  cities  provide  cold 
storage  rooms  for  such  articles,  for  their  own  as  well  as  their  customers' 
accommodation. 


Fish 
Meat 


420  STORAGE  AND  WAREHOUSING. 

and  foreign  countries.  The  great  fish  freezing  and  storing 
houses  in  Washington,  Oregon  and  Alaska,  handle  many  millions 
of  dollars  worth  of  fish  annually.  The  fish  are  mostly  halibut, 
salmon  and  herring,  and  are  frozen  alive  as  caught,  by  placing 
them  in  cold  storage  warehouses,  from  whence  they  are  shipped 
in  refrigerator  cars  to  the  Atlantic  cities  and  to 
Europe.  Cold  storage  of  meat  has  reached  its 
greatest  development  in  Great  Britain,  as  that 
country  imports  60  per  cent,  of  its  meat  supply.  Vast  quantities 
are  shipped  from  the  United  States,  and  besides  a  fleet  of  nearly 
two  hundred  vessels  is  constantly  engaged  in  carrying  meat 
from  Australia,  New  Zealand  and  Argentina  to  England,  the 
meat  being  first  frozen,  and  then  kept  frozen  throughout  the  long 
voyage  across  the  tropics,  in  the  cold  storage  holds  of  the  ships. 
By  experiment  it  has  been  ascertained  that  certain  tem- 
peratures are  best  suited  to  the  preservation  of  certain  products 
and  in  a  well  regulated  warehouse  it  is  comparatively  easy  to 
maintain  at  all  times  the  temperature  best  suited  to  the  purpose. 
Thus  a  temperature  near  the  zero  of  Fahrenheit  best  preserves 
fish,  butter,  ice  cream,  etc.;  20°  to  28°  furs  and 
Temperatures  fabrics;  30°  to  32°  cggs;  31°  to  33°  apples,  fresh 
meat  or  cheese;  34°  to  36°,  pears,  peaches  and 
other  delicate  fruits,  vegetables  and  the  retarding  of  plant  growth 
in  flowers  out  of  season.  All  these  varied  temperatures  are  main- 
tained in  different  rooms  of  the  same  warehouse  at  the  same 
time. 

The  introduction  of  the  refrigerating  machine  in  1890  gave 

the  first  great  impulse  to  the  establishment  of  commercial  cold 

storage  warehouses.     Prior  to  that  time  ice  and  salt  were  the 

only  means  of  securing  the  desired  temperature, 

M*^!?!?*°''         ^nd  this  method  is  still  in  use  to  a  small  extent,  but 

Machine  ' 

it  is  accompanied  with  serious  objections,  such  as 
the  carrying  away  of  the  moisture  from  the  melting  of 
the  ice,  the  difficulty  of  obtaining  sufficiently  low  temperatures 


ARTIFICIAL  REFRIGERATION.  421 

or  of  keeping  them  under  absolute  control  at  all  times,  and, 
especially  in  the  south,  the  excessive  cost  of  the  ice  required. 
All  these  objections  were  overcome  by  the  introduction  of  the 
ammonia  or  carbonic  acid  refrigerating  machine.  Liquid  an- 
hydrous ammonia,  which  can  only  be  kept  so  under  pressure, 
when  allowed  to  expand  into  a  gas,  absorbs  heat.  The  refrigerat- 
ing machine  simply  reconverts  the  gas  into  a  liquid  to  be  again 
expanded,  absorbing  more  heat,  again  liquefied  and  again  ex- 
panded the  process  being  continuous  so  long  as  the  machine 
continues  in  operation. 

The  charges  for  cold  storing  vary  greatly,  and  only  on  the 
most  staple  goods  are  charges  anything  like  fixed.       Apples 

usually  pay  15c.  per  barrel  for  the  first  month 
Charges  and  lOc.  per  month  thereafter.     Butter  for  long 

storage  in  zero  rooms  at  about  l/8c.  per  lb.  per 
month,  at  5°  below  zero  at  l/6c.  per  lb.  per  month.  For  eggs  the 
charge  is  about  10c.  per  case  per  month  or  40c.  for  the  season. 
May  to  January.  The  ordinary  charge  for  storage  of  furs  is:  for 
muffs  75c.  to  $1.00  and  for  fur  capes  or  garments  $1.00  to  $2.50 
for  the  season  of  eight  or  nine  months. 

The  cold  storage  warehouseman,  in  addition  to  receiving 
goods  from  others  for  storage,  is  often  a  purchaser  and  owner 
of  a  considerable  portion  of  the  goods  he  stores.  In  Europe 
generally,  and  in  this  country  to  a  small  extent,  negotiable  ware- 
house receipts  are  issued  for  these  goods  and  used  as  collateral 
Warehouse  ^^^  loans.    The  Icsscr  use  of  these  instruments  of 

Receipts  as  Credit  in  this  country  is  due,  partly  at  least,  to 

ecurity  ^-^^  abscuce  of  any  definite  system  of  inspection 

and  of  licensing  and  hence  the  lender  depends  largely  upon  his 
faith  in  the  integrity  of  the  individual  warehouseman.  The 
very  fact  that  the  goods  are  termed  "perishable"  casts  suspicion 
upon  them  as  security  for  loans  even  though  they  may  be  of 
the  most  staple  character  and  as  safe  as  any  personal  property. 
Insurance  is  a  serious  problem  for  the  cold  storage  ware- 


432  STORAGE  AND  WAREHOUSING. 

houseman,  as  a  slight  damage  by  fire  to  the  refrigerating  ma- 
chinery  might    cause    enormous    damage    to   the 

Insurance  goods  storcd;  hencc  insurance  companies  have  com- 

pelled the  warehouseman  to  become  a  co-insurer 

or  pay  additional  premium  on  a  "consequential  damage"  clause 

in  the  policy. 


TRANSPORTATION    BY   RAIL. 


CHAPTER  XLVIL 

RAILROADING. 

RAILROAD  OWNERSHIP;  CAPITALIZATION;  TRAFFIC  ASSOCIA- 
TIONS;  POOLING;   DIFFERENTIAL   RATES;   ETC. 

In  1830  there  were  thirty  miles  of  railroad  in  the  United 
States.  This  had  increased  to  9,000  miles  in  1850,  to  53,000  in 
1870  and  to  192,162  in  1900.  The  total  railroad  mileage  of  the 
world  in  1900  was,  approximately  445,000  miles,  with  a  capital- 
ized value  of  $35,000,000,000,  and  of  this  the  United  States 
possessed  42  per  cent. — nearly  half.  The  railroad  property  in 
the  United  States  in  1900,  consisting  of  track,  rolling  stock, 
depots,  shops  and  other  buildings  aggregated  nearly  $12,000,- 
000,000.  This  enormous  creation  of  property  and  development 
of  transportation  facilities  has  been  the  product  of  seventy 
years'  effort  and  progress,  all  growing  out  of  the  application  of 
Development  stcam  power.  The  wide  area  of  the  United  States 
of  Railroad  will  explain  in  a  measure  the  enormous  mileage  of 

ransportation  ^^^  lailroad  systems.  The  European  countries 
being  of  smaller  area  have  shorter  railway  lines,  and  yet  it 
should  be  remembered  that  the  United  States  has  the  largest 
mileage  in  proportion  to  population  of  any  nation.  For  every 
10,000  inhabitants  in  the  United  States  we  have  26.1  miles  of 
railway;  England,  Scotland  and  Ireland,  5.2;  Germany,  5.6; 
France,  6.6;  Eussia,  2.2;  Spain,  4.2;  Brazil,  4.7;  and  Argentina, 
19.6. 

The  enormous  development  of  our  railway  interests  has  been 
the  means   of   accelerating   the   commercial   progress    of   the 

438 


434  TRANSPORTATION  BY  RAIL. 

United  States  to  a  wonderful  degree.  This  development  has 
not  only  been  typical  of  the  evolution  of  industrial  organiza- 
tions in  this  country,  but  in  a  large  degree  has  assisted  in  bring- 
ing about  the  wonderful  industrial  advancement  which  has  been 
made  in  the  past  fifty  years.  By  means  of  the  improvement  in 
transportation  facilities  our  industrial  and  social 
Evolution  ^^^^  ^^^  heen  revolutionized.    Producers  have  had 

their  market  widened  until  it  is  now  almost  a 
world  market,  whereas  before,  the  sale  of  many  articles  was 
restricted  to  the  localities  in  which  they  were  produced.  The 
consumer  likewise  has  a  world  market  in  which  to  buy.  He 
is  not  confined  to  his  home  production.  The  prices  of  all  the 
utilities  of  life  are  more  nearly  uniform,  since  improved  trans- 
portation has  given  them  a  better  distribution.  The  variation 
in  prices  due  to  situation  has  been  lessened.  Improved  trans- 
portation has  also  lessened  the  general  prices  of  commodities, 
since  it  enables  either  raw  or  finished  products  to  be  moved 
cheaper,  thus  reducing  the  itemx  of  transportation  which  enters 
into  the  final  cost  of  the  goods.  It  also  enables  the  merchant 
to  "turn  over'^  his  stock  or  capital  quicker  and  oftener  and 
thus  do  business  at  less  expense  and  hence  at  a  smaller  gross 
profit. 

The  development  of  transportation  has  also  been  the  cause, 
in  a  large  measure,  of  the  growth  of  our  cities,  since  it  enables 
manufacturers  to  locate  their  plants  in  the  great  centers  of 
population  where  there  is  an  abundant  supply  of  labor,  and 
where  shipping  facilities  are  favorable,  irrespective  of  the  loca- 
tion of  the  raw  material.  The  steel  mills  of  Chi- 
Agricuiture  ^^S°  ^^^  Milwaukee  are  examples  of  this,  being 

situated  at  a  considerable  distance  from  the  ore 
and  coal,  but  near  populous  centers.  The  location  of  great  in- 
dustrial plants  in  or  near  towns  or  cities  adds  to  their  financial 
and  commercial  importance,  and  this  in  turn  assists  in  their 
growth.     'New  agricultural  districts  have  been  opened  up  and 


RAILROAD  OWNERSHIP.  435 

profitably  cultivated,  through  the  facilities  for  disposing  of  the 
crops,  afforded  by  improved  transportation,  while  other  districts 
have  been  abandoned  or  changed  to  grazing  land,  on  account  of 
the  competition  of  more  productive  localities.  Thus  Massa- 
chusetts has  practically  ceased  to  produce  wheat,  and  now  re- 
ceives its  food  products  from  the  west  in  exchange  for  its 
manufactures. 

The  railroads  of  the  United  States  are  owned  and  conducted 
almost  entirely  by  private  corporations.      The  majority  of  the 
railroads  of  Germany  belong  to  the  government,  and  those  of 
most   other   European   nations,    except   England, 
Ownersliip  ^^®  uudcr  the  direction  and  control  of  the  gov- 

ernment. The  advantages  in  favor  of  government 
control  are,  that  the  system  of  transportation  will  be  operated 
at  actual  cost,  thus  saving  to  the  people  as  a  whole  the  profits 
which  otherwise  would  go  to  private  individuals,  and  that  the 
power  and  control  of  the  government  will  be  extended  and  en- 
larged. This  latter  may  be  desirable  in  a  monarchy,  where  the 
hand  of  the  government  is  constantly  upon  all  of  its  subjects. 
The  Roman  Empire  built  extensive  roads  as  a  means  of  extend- 
ing and  solidifying  its  power.  In  a  republic,  however,  the  same 
reason  scarcely  exists.  The  reasons  against  government  control 
are  that  we  prefer  to  check,  rather  than  extend,  the  power  and 
influence  of  our  government;  that  private  enterprise  supplies 
every  demand  for  transportation  facilities,  and  builds  competing 
lines  which  would  not  be  built  if  our  railroads  were  all  under 
government  control;  that  the  tariff  rates  for  both  passenger  and 
freight  traffic  are  reasonable,  and  are  made  under  government  or 
state  restrictions. 

The  average  capitalization  of  the  railroads  in 
Capitalization       the  United  States  is  lower  than  that  of  any  other 
country,  being  about  $60,000  per  mile.    This  in- 
cludes costly  bridges,  such  as  those  which  span  the  Mississippi 
river,  tunnels  through  mountains  or  beneath  cities,  such  for 


426  TRANSPORTATION  BY  RAIL. 

example  as  those  under  St.  Louis  or  Baltimore,  besides  numer- 
ous examples  of  costly  expenditures  in  the  execution  of  difficult 
feats  of  engineering  and  construction.  The  English  railroads  cost 
$200,000  per  mile,  those  of  France  $128,000  per  mile  and  of 
Germany  $105,000  per  mile.  This  difference  in  cost  between 
American  and  European  railroads  has  been  ascribed  to  various 
causes,  but  is  no  doubt  due  largely  to  the  more  permanent  and 
costly  character  of  European  roads.  Perhaps  more  water  in 
the  stock,  items  of  general  expense  such  as  the  cost  of  floating 
the  bonds,  interest  on  the  capital  while  the  roads  are  under 
construction  and  profits  of  construction  companies,  are  included 
as  a  part  of  the  cost  of  European  roads. 

Inventions  and  improvements  during  the  past  twenty-five 
years  have  steadily  increased  the  efficiency  of  the  railways  and 
made  the  transportation  of  both  passengers  and  freight  not  only 
more  rapid,  but  safer  and  more  economical.  The  substitution 
of  steel  for  iron  rails,  made  possible  by  improved  processes  of 
manufacturing  steel,  the  use  of  heavier  rails — 
Efficiency  morc  than  120  pounds  to  the  yard  in  some  in- 

stances — heavier  cars,  air  brakes,  automatic 
couplers,  block  signals,  all  have  combined  to  improve  the  effi- 
ciency of  our  railway  systems. 

Another  condition  which  has  contributed  powerfully  towards 
the  general  efficiency  of  the  railways  of  the  United  States  dur- 
ing the  past  third  of  a  century  has  been  the  consolidation  of 
companies  and  concentration-  of  management.  The  early  rail- 
way companies  were  small,  and  their  lines  were 
Consolidations  short  with  varying  regulations  and  tariffs.  Be- 
tween Buffalo  and  Albany  in  1850  there  were 
seven  different  companies  operating,  resulting  in  great  incon- 
venience to  both  passengers  and  freight  traffic.  The  small 
companies  have  nearly  all  entered  into  combinations,  or  been  ab- 
sorbed by  large  companies,  until  the  railways  lines  of  the  coun- 
try are  now  combined  in  a  few  great  systems,  with  thousands 


CONSOLIDATIONS.  4»7 

of  miles  of  track,  such  as  the  Pennsylvania,  New  York  Central 
and  Santa  Fe.  As  an  example,  the  Pennsylvania  system  now 
comprises  over  ten  thousand  miles  and  is  composed  of  nearly  two 
hundred  small  railway  lines.  Many  of  these  were  purchased 
outright  by  the  Pennsylvania  Company  and  absorbed  into  the 
system,  while  others  are  operated  as  subsidiary  corporations. 
This  great  system  transacts  one-eighth  of  the  entire  railway 
freight  and  passenger  business  of  the  United  States. 

Railway  associations  and  agreements  in  regard  to  the  main- 
tenance of  rates,  character  and  conditions  of  service  to  be  per- 
formed, classification  of  freight,  interchange  of  cars  whereby 
shipments  between  roads  can  be  made  without  transfers  from 
car  to  car,  establishment  of  rates,  etc.,  have  tended  to  further 
develop  the  efficiency  as  well  as  economy  of  our  railways.    The 

causes  which  brought  about  the  organization  of 
Assocutions         railway  traffic  associations  were  the  necessity  for 

co-operation,  through  tickets  and  through  bills 
of  lading,  the  interchange  of  cars  with  connecting  lines,  so  that, 
for  example,  a  car  load  of  grain  could  be  shipped  from  Minne- 
apolis to  the  seaboard  without  change,  and  the  necessity  for  the 
regulation  of  competition.  As  a  result  we  have  claim  associa- 
tions, car-service  associations,  passenger  associations  and  other 
organizations  for  the  adjustment  of  all  questions  arising  in 
each  department  of  railway  service.  The  organization  of  small 
companies  into  large  ones  and  the  consolidation  of  lines  led  to 
violent  competition  and  rate-cutting  during  the  '70's,  and  was 
finally  overcome  by  the  associations  referred  to. 

From  the  organization  of  railroad  associations  it  was  an 
easy  step  to  "pooling,"  which  consisted  in  dividing  the  total 
earnings  of  several  competing  lines  according  to  an  agreed  basis 
irrespective  of  the  amount  of  business  actually  done  by  the 
different  roads  in  the  pool.*     The   organizing  genius  of  Mr. 


♦The  dangers  of  a  pool  lie  in  the  arbitrary  power  which  it  places  in  the 
hands  of  a  few  men,  to  fix  rates,  control  traffic  and  exercise  a  monopoly 
which  affects  business  interests  extensively,  but  in  this  there  is  a  reliei.  from 


428  TRANSPORTATION  BY  RAIL. 

Albert  Fink  first  developed  the  railroad  pool.  He  organized  the 
Southern  Eailway  and  Steamship  Association  (1875)  in  which 
were  included  nearly  all  of  the  railroad  systems  of  the  south  be- 
sides several  connecting  steamship  lines.  The 
Pooling  object   of   this   pool   was   to   settle   what   portion 

of  competitive  traffic  each  line  should  carry, 
and  those  which  carried  more  than  their  share  were  re- 
quired to  pay  their  rivals  the  excess  receipts  less  the  bare  cost 
of  carrying.  The  "pooling"  feature  was  more  or  less  a  promi- 
nent one  in  nearly  all  railroad  association  agreements  until  pro- 
hibited by  the  Interstate  Commerce  Act.t 

The  earnings  of  the  railroads  of  the  United  States  for  freight 
traffic  are  much  more  important  than  those  for  the  passenger 
service,  being  about  three  times  the  amount  received  for  passen^ 
ger  business.  In  some  parts  of  New  England  where  the  popu- 
lation is  dense,  the  passenger  receipts  may  equal  the  freight,  but 
a  large  portion  of  the  freight  of  the  country  is  hauled  consider- 
able distances,  and  the  earnings  ar.e  correspond- 
Freight  Traffic  iugly  great.  Our  principal  grain  fields  are  1,000 
to  1,500  miles  from  the  seaboard,  and  hundreds 
of  miles  from  the  great  commercial  centers;  our  mines  and  for- 
ests are  situated  long  distances  from  the  coal  beds  or  the  fac- 
tories. The  fruit  from  California  and  live  stock  from  the 
great  plains  of  the  w^est  are  carried  to  the  Eastern  market.  This 
movement  of  great  quantities  of  bulky  freight  long  distances 
results  in  large  revenues  for  freight  traffic  while  the  distance  dis- 
courages passenger  travel. 

Railway  freight  rates  in  the  United  States  average  but  a  cent 


the  evils  of  the  competitive  system  with  its  rate  wars  and  destruction  of 
profits  which  should  accrue  to  stockholders  or  be  used  for  the  betterment  of 
the   road, 

fThe  Interstate  Commerce  Law  was  passed  by  Congress  in  1887,  after 
fifteen  years  of  agitation  and  investigation.  It  prohibited  unreasonable  rates 
and  unjust  discriminations,  between  persons,  places  and  classes  of  traflBc, 
prohibited  pooling  agreements,  provided  penalties  for  violations  of  its  pro- 
visions and  established  a  commission  of  five  men  to  enforce  its  requirements. 


COST  TO  CONSUMER.  429 

and  a  quarter  per  ton  per  mile.*.  This  is  lower  than  any  other 
nation  and  probably  not  more  than  half  what  it  was  thirty 
or  forty  years  ago.  Improved  machinery,  Bessemer  steelt  and 
competition  have  caused  a  steady  decline  in  the  rates.  This 
decline  has  been  accompanied  by  a  general  lowering  of  the 
prices  of  the  most  important  articles  of  traffic,  and  would  have 

been  even  greater  but  for  the  fact  that  it  was  made 
Consumer  ^^  ^^®  ^^^®  °^  stcadily  advancing  wages  for  labor. 

In  the  case  of  most  commodities  the  public  will 
buy  and  use  a  given  quantity  at  a  fair  price.  If  then  the  price 
is  lowered,  the  quantity  consumed  will  be  increased,  or  if  the 
price  is  raised,  the  quantity  will  be  diminished.  Transportation 
charges  are  properly  regarded  as  a  part  of  the  first  cost  of  all 
those  commodities  which  must  be  transported  from  the  producer 
to  the  consumer.  The  consumer  always  "pays  the  freight"  as 
well  as  the  profits  of  the  middlemen,  in  addition  to  the  original 
cost.  Each  producer,  then,  who  desires  to  extend  his  business 
or  increase  his  sales,  perceives  at  once  that  it  is  only  necessary 
for  him  to  secure  lower  rates  on  his  shipments.  Any  concession 
in  rates  cheapens  the  cost  to  the  consumer  and  increases  the 
volume  of  sales.  Whether  certain  articles  shall  he  sold  in  a 
given  locality  often  depends  upon  freight  rates  from  two  com- 
peting points.  Whether  salt  from  Michigan  or  from  Kansas 
will  be  marketed  in  St.  Louis  depends  upon  the  freight  rates  be- 
tween these  two  localities  and  St.  Louis.  Whether  shoes  made  in 
Chicago  can  be  sold  in  Pennsylvania  in  competition  with  eastern 
shoes,  depends  upon  the  freight  rates.  A  persistent  pressure  is 
being  constantly  brought  to  bear  upon  the  railroads  by  both 
shippers  and  consumers  to  secure  a  reduction  of  the  transporta- 
tion charges  in  order  to  extend  sales  or  reduce  the  cost  of  pur- 


*Our  average  passenger  charge  is  2.35  cents  per  mile,  while  that  of  most 
European  countries  varies  from  1.3  to  2  cents. 

t Price  of  Rails  Per  Ton—  1868       1872       1876       1880       1884 

Bessemer  steel    158         112  59  67  31 

Iron    79  85  41  49 


480  TRANSPORTATION  BY  RAIL. 

chases.      This  was  strikingly  illustrated  by  the  rivalry  which 
existed  at  one  time  between  our  principal  seaboard  cities.  New 

York,  Boston,  Philadelphia  and  Baltimore,  in 
Rates^"^*^^  their  efforts  to  secure  export  business.      So  great 

was  the  pressure  brought  to  bear  on  the  railroads 
by  the  commercial  organizations  of  these  cities  in  their  com- 
petition for  export  shipments  that  rates  were  utterly  demor- 
alized. This  was  through  the  competition  of  the  cities,  as  well 
as  the  railroads,  and  to  such  an  extent  was  the  contest  carried 
that  in  1882  it  culminated  in  arbitration  proceedings  in  which 
the  questions  involved  were  submitted  to  a  committee  consisting 
of  Messrs.  Allen  G.  Thurman,  Elihu  B.  Washburne  and  Thomas 
M.  Cooley,  for  adjustment.  The  findings  of  the  committee  re- 
sulted in  fixing  the  relative  freight  charges  to  these  ports,  called 
^^differential  rates,"  upon  such  a  basis  that  they  have  remained 
practically  unchanged  since.  By  this  adjustment  Philadelphia 
was  given  a  small  advantage  over  New  York,  in  the  matter  of 
rates  from  the  West,  and  Baltimore,  a  still  smaller  advantage 
over  Philadelphia.  Owing  to  a  threatened  diversion  of  the  grain 
trade  of  the  Northwest  to  Gulf  ports,  the  rates  on  grain  to  all 
eastern  ports  have  since  been  materially  reduced  to  meet  this 
competition.  A  '^^differential"  rate  then  may  be  defined  as  one 
which  is  made  between  two  points,  not  with  respect  to  the  dis- 
tance as  traversed  by  the  different  transportation  lines,  but  with 
regard  to  competitive  traffic.  Thus  between  Chicago  and  New 
York  the  passenger  fare  is  the  same  on  several  ,lines  of  railroad, 
and  yet  the  distance  traversed  varies  more  than  four  hundred 
miles.* 

While  it  is  strictly  true  that  a  decrease  in  transportation 
charges  causes,  as  a  rule,  an  increased  demand  for  the  products 


♦Between  Chicago  and  New  York  there  are  over  twenty  routes  rarying 
in  length  from  912  to  1,376  miles,  which  compete  for  traffic.  Between  St. 
Panl  and  Chicago  the  short  line  distance  is  373  miles  and  traffic  is  carried 
by  a  line  734  miles  in  length.  Between  Omaha  and  San  Francisco  five  roads 
Qompete,  varying  in  length  from  1,865  to  2,765  miles. 


DIFFERENTIAL  RATES.  481 

shipped,  nevertheless  this  rule  is  not  an  invariable  one.  There 
are  commodities  which  form  a  partial  exception,  and  if  consider- 
able reductions  in  cost  were  made,  the  volume  of  business  would 
be    but    slightly   augmented.       For   example,   rates    on    boots, 

shoes,  clothing  and  household  utensils,  if  reduced 
G*rrai°Rui*°  *     would  uot  materially  increase  consumption,  since 

people  are  inclined  to  purchase  such  articles  as 
they  are  needed.  The  same  could  be  said  of  coffee,  tea,  salt 
and  those  articles  which  are  consumed  in  small  proportion  to  the 
total  value  of  the  requirements  of  consumers.  In  making 
rates  then  for  freight  traffic,  it  would  be  useless  for  an  associa- 
tion to  reduce  the  tariff  on  those  articles  which  have  a  fixed 
and  uniform  demand,  and  would  not  be  influenced  by  a 
reduction. 


CHAPTEE  XLVIII. 

TRANSPORTATION    BY    RAIL— Contkiued. 

CLASSIFICATION    OF    FREIGHT;    FREIGHT    RATES;    COST    OF 
SERVICE;  ETC. 

Almost  an  infirite  variety  of  commodities  is  offered  to  the 
railroad  companies  for  transportation.  If  all  articles  were 
embraced  under  a  single  schedule  and  charged  according  to  bulk 
or  weight,  irrespective  of  value,  those  articles  having  large  bulk 
with  small  value  would  be  charged  exorbitantly,  while  articles 
having  small  bulk  would  escape  their  just  portion  of  trans- 
portation charges.  Thus  coal,  grain  and  lumber 
of^Frlf'^hr""  would  be  subjected  to  a  charge  which  would  be 
prohibitive,  and  would  place  them  beyond  the 
ordinary  uses  for  which  they  are  now  produced.  The  problem  in 
the  classification  of  freight  is  to  so  fix  the  tariff  as  to  produce  the 
greatest  amount  of  revenue  for  the  railroad  and  at  the  same 
time  not  fetter  or  hinder  the  transportation  of  products  by  ex- 
cessive charges.  The  tariff  rates  upon  transportation  lines  have 
an  important  bearing  upon  the  prosperity  of  the  communities 
through  which  they  run,  by  stimulating  or  retarding  production 
of  commodities.  The  earliest  freight  tariffs  involved  a  very 
imperfect  classification,  and  each  railroad  had  its  own  system, 
but  as  the  through  business  developed,  this  multiplicity  of 
freight  rates  was  found  inconvenient  and  cumbersome,  making  it 
difficult  for  shippers  or  buyers  to  ascertain  in  advance  what  the 
freight  charges  upon  a  long-distance  shipment  would  be. 

Kailroads  divide  their  freight  into  four  or  more  general 
classes,  according  to  bulk  and  value.  Goods  having  great  value 
and  small  bulk,  such  as  dry  goods  and  groceries,  are  placed  in 

433 


CLASSIFICATION  OF  FREIGHT.  433 

the  first  class.  Lumber,  fuel,  grain,  ore  and  other  bulky  but 
low  priced  commodities  are  placed  in  the  fourth  or  a  lower 
Object  in  class.     Goods  of  the  first  class  are  charged  two  or 

Classification        three  times  as  much  for  transportation  as  those 

reight  embraced  in  the  fourth  class.     It  is  true   that 

the  greater  risk  assumed  in  carrying  goods  of  high  value,  to- 
gether with  the  extra  care  and  labor  in  handling  or  storing  them, 
will  in  a  measure  justify  a  higher  freight  charge,  but  this  is 
very  slight  in  comparison  with  the  difference  between  the  rates 
upon  the  two  classes.  The  carrying  charges  upon  different 
classes  of  freight  are  not  based  upon  the  cost  of  the  service,  but 
upon  what  traffic  will  bear.  If  a  ton  of  lumber  were  sub- 
jected to  the  same  freight  charge  as  a  ton  of  dry  goods,  no 
lumber  would  be  shipped.  The  freight  rate  would  be  practically 
prohibitive.  Thus  by  means  of  a  wise  classification  of  freight 
the  cheap  trafiic  is  made  possible,  and  the  high-class  traffic  is 
not  seriously  hampered,  the  railroad  revenues  are  increased  by  a 
large  volume  of  business  and  the  public  wants  are  satisfied.  Some- 
times a  commodity  is  placed  in  two  or  more  classes  depending 
upon  the  quantity  shipped.  Thus  car  load  lots  receive  a  lower 
rate  than  is  allowed  to  the  same  commodities  in  less  quantities. 

In  former  years  railroad  companies  sometimes  placed  certain 

commodities  in  a  lower  class  temporarily  in  order  to  stimulate 

new  industries  or  develop  traffic  in  certain  direc- 

Unjust  Dis-  ,.  T  1  .  .  •IT 

criminations  tious.  Large  shippers  were  given  special  ad- 
vantages over  small  ones  in  the  form  of  rebates 
against  their  freight  bills,  and  competing  points  were  accorded 
lower  rates  than  non-competing  points.  An  extensive  system 
of  favoritism  and  discrimination  thus  grew  up  which  abounded 
in  injustice  to  the  public,  and  interfered  with  the  natural  oper- 
ations of  trade.  To  remedy  the  evil,  Congress,  in  1887,  en- 
acted the  Interstate  Commerce  Law,  designed  to  .prevent  un- 
reasonable rates  and  unjust  discrimination  between  persons, 
places  and  classes  of  traffic. 


434  TRANSPORTATION  BY  RAIL. 

At  first  impression  it  would  seem  that  the  charge  for  carrying 
freight  should  depend  wholly  upon  what  it  costs  the  company 
to  perform  the  service,  and  include  a  fair  profit  for  the  capital 
Factors  in  employed  in  the  husiness.     But  freight  rates  are 

Determining  not  usually  fixcd  in  this  way.  Three  factors  must 
reight  ates  -^^  taken  iuto  account  in  determining  rates.  The 
first  is,  what  will  it  cost  the  company  to  furnish  such  service? 
Second,  what  will  the  shipper  be  willing  to  pay,  or  what  can 
he  afford  to  pay?  Third,  what  competition  among  other  trans- 
portation lines,  by  eithe ;  land  or  water,  must  be  met  or  over- 
come in  order  to  secure  tl  e  business.  These  three  factors  in  the 
problem  must  be  considered  in  arriving  at  the  freight  rate. 

It  is  not  practicable  to  fix  rates  on  a  basis  of  cost  of  service, 
because  it  is  not  possible  to  determine  in  any  particular  case 
what  the  actual  cost  of  the  service  has  been.     Thousands  of 

items  must  be  taken  into  consideration  in  arriving 
Cost  of  Service     at  the  total  expenses  of  running  the  road,  and  no 

official  can  say  just  what  proportion  of  these  ex- 
penses should  be  chargeable  against  any  particular  shipment. 
Again,  as  previously  stated,  it  is  only  by  charging  certain  com- 
modities of  high  value  a  large  profit  over  the  cost  of  service,  that 
commodities  of  low  value  can  be  carried  at  a  very  low  rate.* 

Fixing  rates  according  to  the  value  of  the  service  to  the 
shipper,  or  what  he  can  afford  to  pay,  is  called  "charging  what 
the  traffic  will  bear."  This  method  aims  to  make  the  charges 
such  as  to  produce  the  most  revenue  to  the  railroads  without  at 

the  same  time  reducing  the  volume  of  traffic.  If 
Win  Bear  ^^  ^    ^^®  scrvicc  is  of  great  value  to  the  shipper,  and 

enables  him  to  reap  a  large  profit  on  the  goods 
shipped,  he  can  well  afford  to  pay  a  liberal  freight  charge,  and 
this  will  enable  the  railroad  company  to  carry  other  and  less 

♦Commodities  of  low  value  are  carried  at  low  rates  also  on  account  of  the 
large  volume  of  that  trafllc  and  the  slow  speed  of  the  trains.  Thus  coal 
trains  run  at  low  speed,  while  trains  loaded  with  perishable  goods  must  be 
run  at  a  much  higher  speed,  and  at  an  increased  cost. 


FREIGHT  RATES.  435 

profitable  merchandise  at  a  low  rate.  Expensive  articles  of 
small  bulk  will  bear  a  high  charge  without  adding  much  to  the 
percentage  of  increase  in  cost  caused  by  the  carrying  charges, 
while  farm  products  and  other  bulky  freight  must  have  a  low 
rate,  or  they  will  not  be  produced  and  shipped. 

Competition  must  always  be  taken  into  account  in  fixing 
rates.  Charges  must  be  fixed  and  modified  according  to  the 
varying  conditions  under  which  railway  traffic  is  conducted. 
There  is  not  only  the  competition  of  rival  lines  of  railways,  but 
also  that  of  waterways.  In  a  very  large  portion  of 
Competition  the  United  States  shippers  have  a  choice  of  trans- 
portation by  rail  or  by  water  upon  the  great  lakes, 
rivers  and  canals.  There  is  also  the  competition  of  cities  and 
markets  to  be  taken  into  account.  Thus  the  Atlantic  cities  are 
in  sharp  competition  with  gulf  ports  or  outlets  for  the  products 
of  the  Northwest.  A  more  favorable  market  in  one  city  than 
another  will  influence  the  stream  of  traffic  in  a  corresponding 
direction.  Competition  then  is  an  important  factor  in  determin- 
ing freight  rates. 

Attempts  have  been  made  in  various  states  to  prescribe  that 
freight  charges  shall  be  in  proportion  to  distance.  Such  rates 
are  termed  "equal  mileage  rates."  But  these  are  obviously  un- 
fair since  it  costs  a  railroad  company  more  than  half  as  much 
to  carry  a  shipment  fifty  miles  as  to  carry  it  one  hundred  miles. 
Goods  must  be  stored,  handled  and  billed,  the  same  for  a  short 
distance  as  for  a  long  one.  Once  loaded  upon  the 
RatM  ***^'  ^^^^'  ^^^y  require  very  little  care  until  they  reach 
their  destination.  An  equal  mileage  rate  there- 
fore is  an  injustice  to  either  the  railroad  company  or  to  the 
public. 

Owing  to  competition  and  other  causes  it  was  thought  neces- 
sary in  some  cases,  in  order  to  secure  business,  to  take  freight 
for  a  through  shipment  at  a  lower  rate  than  was  charged  for  a 
local  shipment — to  charge  less  for  the  entire  distance  than  for 


436  TRANSPORTATION  BY  RAIL. 

a  part.      This  is  called  the  "long  and  short  haul/'  and  would 
seem  to  be  discrimination  of  the  most  unfair  and  objectionable 

kind.  It  was  quite  common  in  railroad  manage- 
Short  Haul  ment    prior    to    the    passage    of    the    Interstate 

Commerce  Act,  by  which  it  was  made  illegal 
in  all  cases  when  both  charges  were  made  under  "sub- 
stantially similar  circumstances  and  conditions.''  Such  dis- 
criminations have  now  become  infrequent,  and  yet  there  are 
instances  when  the  long  and  short  haul  discrimination  is  justi- 
fiable. To  illustrate,  the  steamship  lines  doing  business  be- 
tween New  York,  other  North  Atlantic  ports  and  New  Orleans 
offer  such  competition  to  the  railroads  that  they  must  either 
make  a  discrimination  in  favor  of  the  long  and  short  haul  or  fail 
to  secure  the  business.  Intermediate  points  are  not  affected 
by  the  water  competition.  The  railroads  can  afford  to  take 
their  through  business  at  a  slight  advance  over  actual  cost 
of  service  rather  than  not  have  it.  They  could  not  reduce  their 
local  rates  to  the  same  basis  without  destroying  their  profits. 
Again,  were  railroads  in  the  United  States  parallel  those  in 
Canada,  a  discrimination  is  justifiable,  for  if  our  railroads  were 
compelled  to  maintain  their  through  rates  on  the  same  basis  as 
their  local  traffic,  it  would  have  the  effect  of  sending  through 
shipments  of  grain  via  Canada  where  the  railroads  are  not  under 
such  restrictions,  and  would  merely  put  profits  in  the  pockets  of 
foreign  railroad  owners.  The  Interstate  Commerce  Commission 
has  held  that  competition  against  foreign  railroads  is  sufficient 
grounds  for  lower  rates  from  terminal  points. 

For  the  purpose  of  facilitating  the  shipment  of  freight,  and 
especially  where  the  property  is  to  be  shipped  a  long  distance, 
over  several  lines  of  railroad,  fast  freight  lines  have  been 
formed.  Nearly  all  of  the  business  from  the  West  to  the 
Atlantic  seaboard  and  territory  east  of  Buffalo  and  Pittsburgh 
is  handled  over  fast  freight  lines.  A  few  of  these  fast  freight 
lines  own  their  own  cars,  do  their  own  billing  and  conduct 
their  business  distinct  from  that  of  the  railroad  companies,  pay- 


FAST   FREIGHT  LINES.  437 

ing  the  different  roads  a  mileage  for  hauling  their  cars.  Most 
of  the  fast  freight  lines,  however,  are  combinations  of  the  rail- 
road lines  merely  for  the  purpose  of  facilitating 
Fast  Freight  |}^g  interchange  of  freight,  and  to  expedite  the 
shipment.  The  railroad  companies  do  their  own 
billing  and  send  a  tissue  copy  to  the  fast  freight  office. 

The  cash  receipts  are  apportioned  among  the  different  roads 
in  proportion  to  the  mileage  of  each  or  on  other  agreed  bases, 
and  in  case  of  a  claim  of  damages,  the  matter  is  taken  up  and 
adjusted  between  the  roads.  The  fast  freight  line  in  this  in- 
stance becomes  a  sort  of  clearing  house  for  carrying  out  a 
mutual  arrangement  between  two  or  more  lines  of  railroad. 

The  methods  of  handling  freight  for  through  shipment  have 
been  so  perfected  that  the  railroads  now  receive  goods  con- 
signed to  all  stations  on  any  road,  and  even  to  many  foreign 
cities.  Upon  delivery  of  the  goods  to  the  railroad  agent  the 
shipper  or  "consignor"  is  furnished  with  a  receipt  in  the  form 
of  "Bill  of  Lading."  Freight  is  shipped  in  two 
Sh!pmlnt  ways,  "straight  consignment"  or  "order."     When 

a  straight  consignment  bill  is  issued,  the  goods 
must  be  delivered  to  the  consignee  or  to  the  person  to  whom  he 
may  order  them  delivered  as  his  agent.  Most  shipments  are  of 
this  class.  An  order  bill  is  one  that  may  be  transferred  by  en- 
dorsement. Such  bills  are  usually  for  the  purpose  of  securing 
the  payment  at  destination  of  a  draft  drawn  for  the  value  of 
the  property.  The  draft  is  usually  pinned  to  the  bill  of  lad- 
ing, and  both  are  sent  through  a  bank  for  collection.  When  the 
draft  is  paid  the  bill  of  lading  passes  to  the  payer.  The  bill 
of  lading  is  also  endorsed  to  him  and  he  may  then  claim  the 
property.  A  way-bill  containing  the  number  and  initials  of 
the  car,  names  of  consignor,  name  and  address  of  consignee, 
place  of  shipment,  place  of  destination,  description,  weight  or 
number  of  articles,  class  and  rate  of  freight,  and  total  freight, 
is  made  out  for  each  shipment,  and  accompanies  the  goods 
through  to  destination. 


FOREIGN    COMMERCE, 


CHAPTER  XLIX. 

TRADE  RELATIONS  WITH  FOREIGN  COUNTRIES. 

DUTIES;    RECIPROCITY;    BOUNTIES;    SUBSIDIES;   NAVAL 
PROTECTION. 

We  scarcely  realize  to  what  extent  we  are  dependent  upon 
the  products  of  distant  countries  and  climes  for  the  comforts 
which  we  are  constantly  enjoying.  The  clothing  which  we 
wear  may  be  from  wool  grown  in  Australia  or  from  silk  grown 
in  France  or  Italy;  the  leather  in  our  shoes  may 
lustrations  havc  come  from  the  plains  of  Uraguay  or  Argen- 
tina; the  furs  that  keep  us  warm  are  from  the  far 
north;  the  rubber  that  protects  us  from  rain  was  the  sap  of  a 
tree  in  Brazil;  the  coffee  we  drink  was  grown  in  Mexico  or 
South  America  and  the  sugar  and  spices  which  we  consume 
were  grown  under  a  tropical  sun.  Not  only  are  we  dependent 
upon  the  worlds  but  in  turn  we  contribute  to  the  world's  demand. 
A  large  portion  of  the  beef  supply  of  England  is  grown  upon  our 
great  western  prairies;  the  wheat  from  Dakota  becomes  bread  in 
Europe;  the  cotton  from  the  south  clothes  the  peasantry  of  the 
Old  World;  the  oil  from  the  wells  of  Pennsylvania  is  trans- 
ported to  distant  lands  and  affords  cheap  and  safe  light  to 
those  who  have  lived  heretofore  in  semi-darkness,  while  Ameri- 
can agricultural  implements,  sewing  machines,  tram  cars,  clocks, 
watches,  typewriters,  electrical  apparatus  and  rubber  goods 
are  furnished  for  world-wide  consumption.  Merchant  ships 
carrying  the  products  of  all  nations  are  upon  every  sea.  They 
cross  and  re-cross,  braving  every  danger  in  order  that  they  may 
distribute  the  products  of  factory,  field,  mine  and  forest. 

438 


FOREIGN  COMMERCE.  489 

The  growth  of  business  relations  between  the  United  States 
and  foreign  countries  has  not  been  uniform  during  our  history, 

Histor  of  "^^  ^^^  ^^  ^^P^  P^^^  ^'^^^  ^^^  progress  in  domestic 

American  affairs.      We  have  been  chiefly  absorbed  in  the 

Commerce  development  of  home  industries.     Now  and  then, 

under  favorable  conditions,  such  as  navigation  or  tonnage  laws 
our  foreign  trade  has  advanced.  The  past  thirty  years  has 
witnessed  a  wonderful  development  in  foreign  commerce,  and 
our  exports  during  this  period  have  almost  uniformly  exceeded 
the  imports.  This  development  has  been  owing  to  the  increase 
in  the  surplus  of  our  food  products,  especially  breadstuff s;  to 
the  development  of  inventions  and  methods  of  transportation; 
to  the  increase  in  the  volume  of  our  manufactures;  and  to  the 
policy  of  reciprocity  which  has  been  in  force  during  a  portion 
of  this  time.  Improved  methods  of  transportation  have  enabled 
the  products  of  the  west  to  reach  the  seaboard  cities  and  from 
thence  European  markets  at  such  rates  as  to  enter  into  com- 
petition with  similar  products  of  other  countries.  Without 
modern  appliances  the  large  export  trade  in  fresh  meats,  butter 
and  fruits  could  not  exist. 

The  foreign  commerce  of  a  nation  is  vitally  affected  by  its 
tariff  policy.  If  it  imposes  duties  upon  imports  it  thus  in  a 
measure  discourages  the  importation  of  foreign  merchandise  in 

order  to  stimulate  home  production.  Or  it  may 
Export  Duties       iHipose  dutics  upou  cxports  in  order  to  encourage 

their  home  consumption.*  Both  import  and  export 
duties  tend  to  diminish  the  volume  of  foreign  commerce.  On 
the  contrary,  the  policy  of  free  trade  tends  to  encourage  and 
increase  foreign  commerce.  England  has  been  practically  a  free 
trade  country  since  1850t  and  her  foreign  commerce  far  sur- 


*Our  constitution  expressly  prohibits  the  laying  of  duties  upon  exports. 

fThe  only  duties  now  under  English  law  are  a  small  export  duty  on 
coal  Imposed  in  1901,  and  import  duties  on  playing-cards,  cocoa,  coffee, 
chicory,  dried  fruits,  tea,  tobacco,  wine  and  beer,  spirits,  liquor,  cordials, 
and  other  articles  manufactured  of  or  containing  spirits. 


440  FOREIGN  COMMERCE. 

passes  that  of  any  other  nation.  It  should  be  remembered, 
however,  that  England  is  an  export  country.  The  limited  area 
of  the  British  islands  compared  to  their  manufacturing  capacity, 
offers  but  a  small  home  market  for  an  enormous  output  of  manu- 
factured products.  Hence  what  England  needs  is  cheap  raw 
materials  brought  in  duty  free,  to  be  converted  into  finished 
products  for  world-wide  sale.  The  United  States  has  pursued 
the  policy  of  a  tariff  upon  imports,  and  has  shaped  this  tariff  not 
with  a  view  of  fostering  foreign  trade,  but  as  a  protection  to 
home  industries.  The  duties  have  been  especially  high  upon 
all  classes  of  products  which  are  produced  within  the  United 
States  in  order  to  prevent  the  competition  of  foreign  countries. 

The  enlightened  policy  of  reciprocity  has  been  one  ipeans 
of  promoting  foreign  trade.  Under  this  policy  two  nations 
mutually  agree  to  admit  the  products  of  each  other  into  their 
ports,  either  duty  free,  or  at  a  reduction  from  the  regular  tariff. 
Congress  passed  an  Act  in  1890  under  which  reciprocity  agree- 
ments were  entered  into  with  Cuba,  Porto  Rico 
Reciprocity  and  scvcral  Central  and  South  American  countries, 

the  effect  of  which  was  to  greatly  stimulate  trade 
with  those  countries,  but  the  law  was  abolished,  and  the  agree- 
ments terminated  on  Aug.  27,  1894,  after  which  our  trade  with 
those  countries  declined.  We  now  have  reciprocity  treaties  in 
force  with  several  European  nations*  and  under  their  potent 
influence  our  foreign  trade  with  those  nations  is  growing  apace. 

A  bounty  is  a  fee  or  percentage  paid  by  the  Government  to 
a  manufacturer  for  products  exported,  as  an  encouragement  to 
Bounty  ^^^  industry.     By  means  of  this  Government  aid 

Countervailing      the  manufacturer  is  enabled  to  sell  his  products  in 
"*^  a  foreign  market  at  a  lower  price,  and  thus  com- 

pete with  foreign   manufacturers.     The   opposite   of  a  bounty 
is  a  countervailing  duty,  levied  upon  imports  in  order  to  neutral- 


*Under  the  Act  of  1897,  the  United  States  made  reciprocity  agreements 
with  Germany,  France,  Italy  and  Portugal,  which  are  still  in  force. 


DUTIES.  441 

ize  the  effects  of  a  bounty  offered  by  the  government  from  which 
the  goods  were  shipped.  For  example,  Germany  and  several 
other  exporting  nations  of  Europe  pay  a  bounty  to  their  manu- 
facturers on  all  sugar  exported.  Such  sugar  when  imported  into 
the  United  States  has  an  advantage  in  our  markets  on  account  of 
the  bounty,  over  Cuban  sugar  or  that  from  our  own  refineries. 
To  offset  this  advantage  and  protect  other  sugars  in  our  markets, 
our  Government  may  levy  a  countervailing  duty  in  addition  to 
the  regular  tariff. 

Navigation  and  tonnage  laws  have  at  different  periods  been 
resorted  to  by  this  and  other  countries  as  a  means  of  foster- 
ing shipping  and  encouraging  foreign  commerce.  Soon  after 
our  Constitution  was  adopted,  the  United  States  passed  a  series 
of  tariff  and  tonnage  Acts  by  which  the  duties  were  lower  on 
goods  imported  in  American  vessels  entering  our 
^o^n'^nagrActr**  P^rts.  About  1850  both  England  and  the  United 
States  abandoned  the  policy  of  navigation  laws 
and  since  that  date  no  effort  has  been  made  through  legislation 
to  build  up  a  merchant  marine.*  As  a  result  our  shipping  in- 
terests have  steadily  declined  since  1857.  At  that  time  we 
carried  75  per  cent,  of  our  foreign  commerce  in  American  ships. 
In  1902  this  percentage  had  fallen  to  a  little  less  than  8  per 
cent. 

The  term  subsidy,  as  applied  to  shipping  denotes  the  gift  of  a 
sum  of  money,  either  annually  or  otherwise,  by  the  Government 
as  an  aid  and  encouragement  to  the  extension  and  up-building 
of  marine  interests.     From   1846   to   1856, — a   period   of  ten 


♦A  law  was  passed  in  1792,  and  is  still  in  force,  requiring  all  ships 
whicli  carry  tlie  United  States  flag  and  are  registered  as  belonging  to  tlie 
United  States,  to  be  made  in  this  country.  Instead  of  stimulating  ship- 
building in  this  country,  this  law  has  had  the  effect  in  recent  times  of 
causing  large  amounts  of  American  capital  to  be  invested  in  foreign-built 
8  ips,  carrying  foreign  flags,  since  a  steel  ship  could  be  built  on  the  Clyde 
from  fifteen  to  twenty  per  cent,  cheaper  than  in  this  country.  The  abolition 
of  thiis  law  is  advocated  by  those  who  favor  "free  ships,"  so  that  American 
capital  can  sail  under  our  flag,  without  regard  to  where  the  ships  are  built. 


443  FOREIGN  COMMERCE. 

years,  our  Government  pursued  the  policy  of  subsidizing  steam- 
ship lines  by  paying  large  bounties  for  carrying  the  United 
States  mails.  As  a  consequence  the  tonnage  of  our  steamships 
registered  for  deep-sea  carrying,  which  in  1847  was  5,631  tons, 
increased  to  115,045  tons  in  1855,  and  our  Mer- 
Tramps*^  chaut    Marine    reached    its    greatest    height    of 

strength  and  glory.  The  Collins  Line  of  mail 
steamers  was  established  between  New  York  and  Liverpool, 
under  a  favorable  contract  for  carrying  the  mails  and  success- 
fully competed  with  the  heavily  subsidized  Cunard  Line  of 
England.  Contracts  were  also  entered  into  by  our  Government, 
with  lines  of  steamers  to  the  West  Indies,  Panama  and  Pacific 
Coast  ports.  But  in  1856  the  law  was  modified  and  the  sub- 
sidies seriously  reduced.  In  1858  the  subsidies  were  virtually 
abolished  and  the  actual  postage  rate  on  letters  carried  was  sub- 
stituted. This  continued  to  be  the  policy  of  our  Government 
until  the  enactment  of  the  Postal  Aid  Law  of  1891,  which  in  a 
measure  increased  the  compensation  for  carrying  the  mail. 

England  has  encouraged  shipping  by  liberal  subsidies,  and 
through  this  means  has  built  up  lines  of  steamers  to  all  parts 
of  the  world.     She  has  awarded  liberal  contracts  to  her  ship- 
yards for  the  construction  of  war  ships  and  trans- 
subsiSes  ports  in  order  to  encourage  the  extension  of  priv- 

ate shipyards.  Direct  subsidies  to  shipbuilders 
and  shipowners  who  would  build  after  plans  furnished  by  the 
Admiralty,  and  enormous  indirect  subsidies  for  carrying  the 
mails,  supplies  or  troops  have  been  bestowed,  by  the  English 
Government.  France  pays  a  bounty  per  ton  on  all  ships  built 
in  French  shipyards  of  steel  and  a  subsidy  per  ton  for  every 
thousand  miles  sailed  by  French  vessels. 

A  "tramp"  steamer  is  one  which  has  no  regular  sailing  route, 
is  not  subsidized  and  goes  to  any  port  where  it  can  secure  a 
cargo.  English  and  German  tramp  steamers  are  in  all  parts  of 
the  world.     Sometimes  a  period  of  one  or  two  years  elapses 


SUBSIDIES.  443 

before  a  tramp  returns  to  its  home  port.  Such  ships  have  the 
advantage  over  those  of  a  regular  line,  in  that  they  are  not 
obliged  to  sail  on  fixed  dates  and  perhaps  with  insufficient  cargo, 
but  may  cruise  from  port  to  port  until  a  cargo  is  secured.  Sail- 
ing ships  aim  to  make  direct  voyages  in  which  they  can  carry 
cargo  both  ways. 

One  of  the  first  conditions  of  foreign  commerce  is  the  pro- 
tection of  property  and  persons  in  what  ever  part  of  the  earth 
they  may  be.     This  can  only  be  secured  by  a  navy  which  shall 
command  respect  in  every  sea  and  port.     "Trade 
I'^l';  ^°"°'^^      follows  the  flag"  is  a  commercial  aphorism  now 

the  Flag  »  .  -xr  ■• 

well  recognized  by  the  great  nations.  No  nation 
can  hope  to  build  up  a  large  or  prosperous  foreign  commerce 
which  has  not  a  well-equipped  navy*  sufficiently  large  to  enable 
it  to  scatter  ships  to  all  quarters  of  the  civilized  world,  within 
protecting  distance  of  the  interests  of  its  citizens.  Ship  cap- 
tains in  the  absence  of  Consuls  should  be  allowed  a  degree  of 
discretion  in  the  settlement  of  questions  requiring  prompt  action, 
where  the  rights  of  American  citizens  are  in  jeopardy.  English 
ship  captains  have  such  discretion  and  may  exact  reparation  for 
wrongs  inflicted  upon  a  British  subject  in  a  foreign  port  with- 
out waiting  to  communicate  with  their  home  Government. 

As  an  important  adjunct  to  our  coastwise  and  foreign  com- 
merce the  Government  maintains  over  two  thousand  light  houses 
at  all  danger  points  along  our  coasts,  besides  several  thousand 
buoys,  fog-horns  and  bells  as  guides  to  ships  entering  or  leaving 
our  harbors.  Harbor  masters  are  appointed  whose  duties  in- 
clude the  regulation  of  shipping  within  the  har- 
Buo^ys^Etr^'  ^°^^'  licensing  of  pilots,  inspection  of  ships,  etc. 
Although  ships  may  sail  upon  any  sea  it  is  cus- 
tomary to  require  all  vessels  to  be  registered  in  some  country. 
Ships  are  then  said  to  belong  to  the  country  in  which  they  are 


•The  United  States  stands  fourth  among  the  great  nations  in  the  tonnage 
of  its  navy,  England  being  first,  France  second,  and  Russia  third. 


444  FOREIGN  COMMERCE. 

registered,  and  bear  its  flag.  The  ship  carries  papers  stating  the 
facts  concerning  its  registry,  ownership,  inspection  to  secure 
safety,  the  name  of  the  port  from  which  it  last  sailed,  its  destina- 
tion and  the  nature  of  its  cargo.  The  custom  of  carrying  papers 
originated  in  the  attempts  to  suppress  piracy,  but  is  continued 
to  the  present  time,  chiefly  for  the  information  which  it  fur- 
nishes of  a  commercial  nature. 


CHAPTEK  L. 
FOREIGN  COMMERCE— Continued. 

INTERNATIONAL   LAW;  TREATIES;   CONSULAR   SERVICE;   FOREIGN 

EXCHANGE. 

The  law  of  nations  is  a  system  of  usages,  customs  and  opin- 
ions founded  upon  the  general  principles  of  right  and  Justice 
as  understood  in  this  enlightened  age,  and  which  has  become 

established  by  the  great  nations  of  the  world. 
Law°*^°°  This   system    regulates    the    conduct    of    nations 

towards  each  other  commercially  as  well  as  polit- 
ically, and  is  binding  upon  all  by  common  consent.  The  great 
nations  of  Europe  together  with  the  United  States,  being,  as  we 
have  reason  to  believe,  the  most  enlightened  and  just  of  the 
world,  as  well  as  the  most  powerful,  have  established  a  code 
of  international  law  peculiar  to  themselves.  Under  this  law 
treaties  are  made  and  enforced,  commerce  between  countries  is 
regulated  and  the  rights  of  citizens  abroad  are  protected. 

Treaties  are  of  three  kinds,  viz.,  treaties  of  commerce, 
treaties  of  peace,  and  territorial  treaties.  Treaties  of  commerce 
define  and  establish  the  rights  and  extent  of  commercial  inter- 
course. Every  nation  may  enter  into  commercial  treaties  and 
grant  such  special  privileges  to  other  nations  as  it  sees  proper. 

It  may  grant  special  privileges  to  one  nation  over 
Treaties  another,  or  enter  into  special  agreements  as  in  the 

ease  of  reciprocity  treaties.  It  may  even  refuse  to 
conduct  any  intercourse  whatever  with  foreign  nations,  as  was 
the  case  when  President  Jefferson  laid  the  general  embargo  on 

445 


446  FOREIGN  COMMERCE. 

trade  in  1807,  or  it  may  reserve  to  itself  such  portions  of  its  trade 
as  it  deems  proper.  An  instance  of  this  may  be  seen  in  the 
reservation  of  the  coasting  trade  of  the  United  States  to  our 
own  ships.  Treaties  of  peace  are  made  as  a  result  of  war.  They 
may  provide  for  the  payment  of  money,  as  indemnity,  the  cession 
of  territory  or  the  granting  of  special  privileges,  such  as  coaling 
stations,  etc.  Territorial  treaties  are  in  effect  contracts  made 
between  nations  for  the  purchase  or  sale  of  domain.  Such  was 
our  treaty  with  France  for  the  purchase  of  Louisiana,  with  Spain 
for  the  purchase  of  Florida,  with  Mexico  for  the  Gadsden  pur- 
chase, and  with  Eussia  for  the  purchase  of  Alaska. 

In  order  to  regulate  foreign  commerce,  carry  out  the  pro- 
visions of  treaties  and  protect  the  rights  of  citizens  abroad  each 
nation  exercises  jurisdiction  over  its  seamen,  vessels  and  mer- 
chandise in  foreign  lands.  This  is  done  through  the  consular 
service.  In  every  port  of  any  consequence  throughout  the 
world  the  United  States  is  represented  by  one  or  more  consular 
officers.  These  are  divided  according  to  their 
serv^clT'^  rank  and  importance,  into  Consuls-Greneral,  Con- 

suls, Vice-Consuls,  Consular  Agents  and  Commer- 
cial Agents.  They  are  appointed  by  the  President,  and  their 
compensation  is  fixed  in  one  of  three  ways,  viz.:  (1)  A  fixed 
salary.  (2)  A  salary  with  permission  to  engage  in  business,  and 
(3)  Fees,  with  permission  to  engage  in  business.  Those  who 
receive  a  fixed  salary  and  devote  their  entire  time  to  the  duties 
of  the  office,  embrace  all  of  those  officials  who  occupy  posts  in 
the  foreign  cities  with  which  the  United  States  has  extensive 
trade  relations.  In  this  class  of  consulates  the  receipts  from 
fees  are  paid  over  to  the  government.  Those  consuls  who  are 
allowed  to  engage  in  business  occupy  stations  where  the  business 
of  the  consulate  does  not  engage  their  entire  time,  and  those 
who  receive  fees  and  are  allowed  to  engage  in  business  occupy 
posts  in  which  the  duties  of  the  office  require  but  a  small  part  of 
the  agent's  time. 


CONSULAR  OFFICERS.  447 

The  duties  of  consular  officers  in  foreign  ports  are  numerous 
and  embrace  the  carrying  out  of  treaty  regulations;  adjustment 
in  cases  of  disagreement  between  master  and  seamen;  salvage 
in  cases  or  shipwreck;  receiving  reports  of  ship-captains  on  enter- 
ing and  leaving  the  port;  sending  to  the  home 
conrui^^officer  government  reports  on  the  condition  of  trade; 
granting  of  passports  and  protection  of  citizens; 
care  of  property  of  deceased  citizens;  extradition  of  fugitive  crim- 
inals; certification  of  invoices  of  goods  to  be  shipped  to  the 
United  States,  etc. 

This  latter  is  one  of  the  most  common  duties  of  a  consul. 
The  invoices  of  all  goods  imported  into  this  country  must  pass 
through  the  hands  of  the  American  Consul  at  the  port  from 
which  they  come.*  If  the  goods  are  to  be  shipped  from  an  in- 
terior town  or  city  they  are  forwarded  with  full  particulars  as 
to  their  value,  size,  number,  etc.;  to  a  shipping  or  forwarding 
agent  in  the  seaport  town  who  for  a  small  commis- 
fnvokM  ^i°^   attends   to    the    details    of   shipment.     The 

shipper  makes  out  an  invoice, — three  copies. 
These  he  takes  to  the  office  of  the  consul,  and  makes  oath  that 
the  prices,  quantities,  etc.,  are  absolutely  correct.  The  oath  is 
a  precaution  against  fraud,  for  otherwise  an  American  importer 
and  foreign  merchant  might  enter  into  a  collusive  arrangement 
for  falsifying  an  invoice  and  making  the  price  lower  than  it 
really  was,  thus  defrauding  the  Government  out  of  a  portion 
of  its  revenue.  The  consul  files  one  copy  of  the  invoice  at  his 
office;  one  copy  he  sends  to  the  custom  house  where  the  goods 
are  to  be  entered  for  export  and  the  third  is  given  to  the  shipper, 
together  with  the  consul's  certificate.  The  shipper  then  turns 
the  goods  over  to  the  agent  of  the  steamship  line,  and  receives  a 
bill-of -lading  also  made  out  in  duplicate  or  triplicate.     The  ship- 

*Likewise  the  invoices  of  all  goods  exported  from  the  United  States  must 
pass  through  the  hands  of  the  foreign  consul  at  the  port  in  the  United  States 
from  which  they  are  shipped. 


448  FOREIGN  COMMEKGE. 

per  keeps  one  copy  of  the  bill-of-lading,  one  copy  is  pinned  to 
the  invoice  and  consular  certificate  and  forwarded  to  the  con- 
signee at  the  port  of  destination;  and  in  some  instances  one  copy 
goes  to  the  ship's  captain,  as  the  "Captain's  Copy."* 

An  important  factor  in  foreign  commerce,  and  one  which  ex- 
porters frequently  overlook,  is  the  proper  packing  of  goods  for 
export.  This  should  be  governed  almost  wholly  by  the  condi- 
tions to  be  met  with  in  the  country  to  which  the  goods  are  sent. 
For  mountainous  countries  without  good  roads,  as  for  example. 

South  America,  goods  destined  for  interior  towns 
Packing  Goods      are  transported   upon   the  backs   of  mules   over 

rocky  and  tortuous  roads,  and  hence  must  be 
packed  in  boxes  or  bales  that  can  be  readily  carried  in  this  man- 
ner, one-half  the  load  being  Upon  each  side  of  the  animal. 

Again  the  arrival  of  goods  in  the  rainy  season  or  in  the  dry 
season  would  niake  a  difference  as  to  the  method  of  packing, 
but  as  a  general  rule  all  merchandise  which  would  be  injured  by 
water  should  be  packed  in  boxes  lined  with  zinc  and  oilcloth,  or 
waterproof  paper,  or  if  packed  in  bales  should  be  covered  with 
oilcloth  or  tarpaulin  beneath  the  outer  coverings  of  the  bale.  As 
far  as  practicable  only  one  kind  of  goods  should  be  packed  in  a 
box  or  bale,  otherwise  there  may  be  trouble  in  passing  the  goods 
through  the  foreign  custom  house. 

Houses  engaged  in  foreign  commerce  use  a  distinctive  mark 
— a  trade-mark, — of  such  a  character  or  design  as  to  be  recog- 
nized by  the  purchasing  public  in  whatever  country  the  goods 

are  offered  for  sale,  as  the  mark  of  the  American 
Trade  Marks         manufacturer  or  exporter.     We  are  told  that  the 

"Mt.  Vernon"  brand  of  flour  made  by  George 
Washington  was  accepted  abroad  as  of  especial  excellence,  and 
the  same  would  be  true  to-day  in  regard  to  the  value  of  a  special 


♦When  a  bill-of-Iading  is  made  out  to  order  it  is  transferable  by  en- 
dorsement the  same  as  inland  bills.  The  bill  has  printed  across  its  face 
"Original,"  "Duplicate"  or  "Triplicate,"  one  of  which  being  honored  by 
delivery  of  the  goods,  the  other  two  become  void. 


^s^  TRADE  MARKS.  449 

name  or  mark.  Foreigners  are  often  unable  to  discriminate  or 
judge  of  the  merits  of  foreign  manufactures,  and  knowing  that 
a  certain  brand  has  been  tried  and  found  satisfactory,  they  con- 
tinue to  purchase  it.  The  United  States  has  entered  into  agree- 
ments with  nearly  all  of  the  leading  commercial  nations  with 
regard  to  the  protection  of  trade-marks,  but  in  order  to  secure 
this  protection  the  trade-mark  must  be  registered.  Mere  use, 
however  long  continued,  does  not,  as  in  this  country,  determine 
the  right  tc  the  exclusive  use  of  the  mark. 

An  important  element  in  foreigr  trade  operations  is  the 
banking  feature.  As  previously  explaired,  one  of  the  important 
functions  of  banks  is  to  supply  the  necessary  capital  to  bridge 
over  the  interval  of  time  between  producer  and 
FertuTe^  consumer.     This  in  the  case  of  foreign  trade  is 

necessarily  considerable,  since  the  producer  or 
manufacturer  is  situated  perhaps  thousands  of  miles  from  the 
consumer,  and  weeks  or  even  months  are  required  before  the 
products  reach  their  destination  and  are  paid  for.  When  goods 
are  shipped  to  a  foreign  customer  in  many  cases  no  drafts  are 
drawn,  the  amount  being  simply  charged  in  account  to  await 
remittance  by  bank  draft  through  due  course  of  mail.  In  other 
cases  documentary  drafts  are  drawn  for  the  shipment  C.  I.  F.* 
and  forwarded  through  the  bank.  Such  drafts  are  usually  pay- 
able at  sight  or  a  given  number  of  days  after  sight  and  the 
shipping  documentst  attached  are  to  be  surrendered  on  payment. 
If  the  draft  has  considerable  time  to  run  it  is  generally  dis- 
counted with  a  home  banker. 

Drafts  drawn  against  foreign  shipments  are  usually  made  pay- 
able in  the  currency  of  the  country  in  which  they  are  to  be  paid. 
Thus  a  shipment  to  Germany  is  payable  in  marks,  to  Mexico  in 
pesos,  etc.     The  seller  takes  the  risk  of  fluctuations  in  exchange. 


♦C.  I.  F.  means  cost,  insurance  and  freight. 

f  Tlie  shipping  documents  here  referred  to  consist  of  invoice,  bill-of-lading 
and  insurance  certificate. 


450  FOREIGN  COMMERCE. 

and  this  is  one  of  the  disadvantages  in  selling  to  customers  the 
rate  of  exchange  in  whose  country  is  not  uniform. 

The  bank  forwards  the  draft  with  documents  attached  to  a 
bank  at  the  place  where  it  is  payable.     The  bank  there  presents 
the  draft  tor  payment  or  acceptance.     If  a  time  draft,  the  goods 
are  usually  landed  and  warehoused  by  the  bank, 
Exchange  Until  the  draft  is  paid.     In  case  the  consignee 

desires  t^  withdraw  a  portion  of  the  goods  from 
the  warehouse  he  may  arrange  with  the  bank  to  do  so  by  paying 
a  portion  of  the  draft,  the  amount  being  endorsed  thereon.  At 
maturity  the  draft  is  paid  plus  interest  from  its  date  until  the 
approximate  time  it  will  require  a  remittance  to  reach  the  point 
of  shipment  in  the  United  States,  and  also  plus  the  storage 
charges.  The  bill-of-lading  and  insurance  certificate  are  de- 
livered to  the  drawer  when  the  draft  is  paid. 

Within  twenty-four  hours  after  a  ship  touches  a  dock  in 
any  port  of  the  United  States  the  captain  or  a  duly  authorized 
officer  must  hand  in  to  the  Custom  House  the  "Ship's  Report," 
No  goods  can  be  landed  nor  even  bulk  broken  until  this  formal- 
ity is  complied  with.*  This  report  is  a  document  in 
ofswps*  prescribed  form  giving  the  name  and  tonnage  of 

the  vessel,  name  of  the  captain,  number  of  the 
crew,  port  from  whence  arrived,  and  a  full  and  complete  detailed 
list  of  the  entire  cargo,  the  number  of  boxes,  bales,  barrels  or 
casks  and  their  contents  so  far  as  is  known,  the  names  of  the 
shippers  and  the  consignees.  This  report  is  made  out  in  dupli- 
cate. One  copy  is  retained  in  the  Custom  House  and  the  other 
is  sent  to  an  officer  at  the  dock  where  the  ship  is  to  unload, 
who  checks  off  the  goods  as  they  are  discharged  from  the  vessel. 
The  goods  are  now  delivered  to  holders  of  bills  of  lading,  upon 
payment  of  the  freight  and  duties  or  other  charges,  or  if  not 
called  for  at  once,  are  sent  to  bonded  warehouses. 


♦This  report  is  usually  given   to  the  custom  house  officer  who  comes 
aboard,  in  many  cases  with  the  health  officer. 


CLEARANCE   OF  SHIPS.  451 

When  a  vessel  is  completely  loaded  the  master  must,  before 
being  allowed  to  sail,  receive  his  clearance  papers  from  the 
port  authorities.     The  permit  to  sail  is  based  upon 
of'shtps'^'^  the  captain's  report  of  cargo  and  passengers,  pay- 

ment of  dockage,  pilotage,  seamen's  wages,  etc. 
When  these  are  satisfactory,  permission  is  given  to  sail. 


FOREIGN  EXCHANGE. 


CHAPTEE  LI. 

INTERNATIONAL  SETTLEMENTS. 

INTERCHANGEABLE  VALUES;    MINT    PARITY;    ARBITRAGE;    GOLD 

SHIPMENTS. 

International  trade,  or  the  exchange  of  commodities  between 
nations,  requires  a  medium  by  means  of  which  resulting  balances 
can  be  satisfactorily  settled.  The  ultimate  medium  adopted  for 
this  purpose  is  pure  gold,  and  this  metal  is  the  basis  of  all  cal- 
culations  in  connection  with  foreign  exchange.  Of 
Value  of  course  for  practical  purposes  the  metal  must  have 

^^^  an  alloy,  and  each  nation    has    determined    the 

quantity  of  base  material  employed  independent  of  other  coun- 
tries, but  nevertheless  they  are  all  pretty  nearly  in  unison.  The 
general  system  employed  is  9-lOths  pure  gold  and  1-lOth  alloy, 
with  the  exception  of  Great  Britain,  which  uses  11-12  and  1-12. 
A  further  circumstance  is  the  legal  value  placed  upon  the  metal, 
thus  giving  assurance  for  all  time  that  its  value  will  be  stable; 
and  it  is  this  officially  made  stability  which  renders  it  possible 
to  determine  the  value  of  the  money  of  one  country  in  that  of 
another.  The  value  of  gold  in  the  following  countries  as  de- 
termined by  law  is  respectively: 

Great  Britain,  1  oz.,  ll-12ths  fine  =  77/10 

United  States,  25  8-lOths  grains,  9-lOths  fine,      $1.00 

Germany,         122.915  grains,  9-lOths  fine,      M.  20 

Latin  Union,      99.561  grains,  9-10th8  fine,      F.  20 

Taking  these  gold  values  as  a  basis  we  arrive  at  the  follow- 
ing interchangeable  values  of  the  various  coins: 

452 


FOREIGN  EXCHANGE.  453 

One  pound  sterling  weighing  123  27-100  grains  11-12  fine 
equals  $4.8665,  equals  Fc  25.2215,  equals  Marks  20.4296.  This 
Interchangeable  "^^  what  is  termed  the  mint  parity,  or  the  value 
Values  at  which  the  respective  mints  in  London,  Wash- 

Mint  Parity  ington,  Paris  and  Berlin,  would  accept  the  coins 

of  each  of  the  other  nations. 

The  following  weights  of  the  principal  coins  of  the  four 
above-named  nations,  will  enable  the  student  to  follow  out  the 
calculation  for  himself: 

1  Eagle  or  $10  =  258  grains,  9-10  or  232  grains  pure  gold. 
Sovereign,  £1,  =  123.270  grains,  11-12  or  113  grains  pure  gold. 
1  Double  Crown,  or  M.  20  =  122.915  grains,  9-10,  or  110.624  grains 
pure  gold. 

1  Napoleon  or  Fc.  20  =  99.561  grains,  9-10,  or  89.605,  grains  pure  gold. 

The  foregoing  is  the  fundamental  basis  of  foreign  exchange, 
and  with  these  principles  firmly  grasped,  the  various  ramifica- 
tions of  the  business  are  readily  understood. 

In  the  early  period  of  international  commerce,  when  each 
European  principality  coined  its  own  money  and  falsified 
and  clipped  it  according  to  the  needs  and  exigencies  of  its 
petty  sovereign,  the  only  international  medium  of  exchange 
was  the  promissory  notes  of  the  great  merchants  of  the 
middle  ages.  These  notes  circulated  the  year  around  as  money, 
and  were  payable  as  a  rule  on  certain  days  at  certain  cities  where 
the  great  annual  fairs  were  held,  and  were  redeem- 
Historicai  able  at  fixed  values  in  silver.    A  striking  instance 

of  the  power  wielded  by  these  merchant  princes  is 
to  be  found  in  the  history  of  the  steelyard  in  London,  a  settle- 
ment of  Hansa  merchants  in  the  city,  making  their  own  laws  and 
governed  only  by  their  own  rules  and  traditions,  regardless  of 
the  laws  of  the  land  whose  hospitality  and  protection  they  en- 
joyed. The  pound  of  silver  was  the  measure  of  value,  but  the 
pound  of  silver  was  an  unknown  quantity  unless  it  was  desig- 
nated in  the  bond  as  a  pound  of  silver  of  the  Esterlings,  or 
strangers — ^hence  the  origin  of  the  term  Pound  Sterling,  which 


454  FOREIGN  EXCHANGE. 

has  subsequently  been  adopted  as  the  denominational  standard  of 
value  of  Great  Britain.  Modern  legislation  has  remedied  all  the 
defects  of  the  earlier  systems,  but  a  recital  of  former  conditions 
is  none  the  less  interesting  as  an  introduction  to  our  present 
methods,  which  are  the  fruits  of  evolution  and  have  been  placed 
upon  a  scientific  basis  of  fact. 

Goods  are  being  transported  from  one  country  to  another, 
and  this  is  the  natural  method  of  liquidating  an  international 
indebtedness.  This  failing,  recourse  is  had  to  the  transfer 
of  credits  arising  out  of  former  transactions,  and  as  a  last 
resort,  refuge  is  had  to  shipping  bullion  or  minted  coin.  Let  us 
Liquidation  of  f oHow  a  shipment  of  hardware  from  England,  val- 
internationai  ucd  at  Say  $1,000,  to  South  America,  where  for 
nee  ness  argument's  sake  it  has  been  disposed  of  for  $2,000. 
Instead  of  remitting  the  money  to  England  and  sending  the  ship 
back  empty,  the  agent  of  the  English  merchants  purchases  hides, 
which  are  forwarded  to  France,  as  the  best  market,  and  are  there 
sold  for  $4,000.  The  ultimate  result  of  this  transaction  is  that 
France  owes  England  a  debt  of  $4,000  which  must  be  liquidated 
in  either  of  the  foregoing  methods.  Now  the  probabilities  are 
that  goods  will  be  forwarded  to  England  and  there  disposed  of  at 
a  profit.  We  have  assumed  that  this  train  of  transactions  has 
been  carried  on  by  one  merchant  and  his  agents,  but  this  is  not 
the  modern  wa}^,  and  it  is  here  that  international  banking 
steps  in  as  the  connecting  link  between  each  transaction,  but  the 

ultimate  liquidation  has  taken  place  by  the  ship- 
Banling°"^^        meut  of  merchandise  notwithstanding.     In  each 

case  the  banker  has  been  called  upon  to  provide 
the  funds  and  the  buying  and  selling  of  the  bills  of 
exchange  is  what  constitutes  the  liquidation.  But,  never- 
theless, the  exchange  of  merchandise  is  the  essence,  hence 
it  is  clearly  demonstrated  that  the  economical  method  of  liquidat- 
ing an  international  trade  balance  is  through  the  sale  of  com- 
modities. 


INTERNATIONAL  BANKING.  455 

This  constant  interchange  of  commodities  creates  credits  and 
debits  and  foreign  transactions  are  carried  out  primarily  with  a 
view  to  adjusting  these  balances.  The  debits  are  set  off  against 
the  credits,  and  only  the  balance  is  left  for  settlement  in  money. 
A  nierchant  shipping  goods  to  a  foreign  port  desires  reim- 
bursement therefor  immediately  the  goods  are  loaded.  He 
therefore  draws  on  the  purchaser,  attaches  to  the  draft 
all  evidences  of  the  shipment,  and  negotiates  the  draft 
through  his  banker.  He  here  incurs  a  risk  that  on  arrival 
the  purchaser  may  be  insolvent,  or  for  specious  reasons  may 
refuse  to  accept  the  goods,  thus  entailing  loss  and  perhaps  ruin, 
consequently  this  method  is  only  adopted  where  the  shipper  is 
well  acquainted  with  the  purchaser's  financial  standing.  Other- 
wise he  requires  a  bank  credit — i.  e.,  an  undertaking  on  the  part 

of  a  bank  that  his  drafts  if  drawn  under  certain 
Methods  conditions  will  be  promptly  paid.    We  will  say  the 

above  shipment  was  made  to  Germany,  but  the 
banker  negotiating  the  bill  has  no  use  for  funds  in  that  country, 
but  desires  the  money  in  London.  Now  any  number  of  courses 
are  open  to  him,  which  will  enable  him  to  place  the  money  to  his 
credit  in  London.  He  can  send  the  bill  of  exchange  to  his  Berlin 
bankers  for  discount,  if  it  is  a  time  bill,  and  instruct  them  to 
buy  a  transfer  on  London;  or  he  can  remit  the  bill  direct  to 
London  and  sell  it  in  the  open  market;  or  he  can  have  his  Berlin 
bankers  buy  French  exchange  and  remit  this  to  London  for  sale, 
or  purchase  therewith  in  Paris  transfers  on  London.  There 
really  is  no  end  to  the  combinations  that  can  be  made,  but  for 
all  practical  purposes  there  are  very  rarely  more  than  three, 
and  those  under  very  peculiar  conditions;  but  the  writer  recalls 
one  particular  transaction  which  required  the  intermediary  of 
four  financial  centers  before  it  was  brought  to  a  satisfactory 

conclusion.  This  method  of  adjusting  balances 
Arbitrage  is  Called  arbitrage,   or   arbitration,   and  is   quite 

common  among  foreign  bankers;  in  fact  by  some  is 
made  a  special  feature  of  the  business. 


456  FOREIGN  EXCPIANGE. 

The  parity  of  exchanges  with  America  as  the  center,  is  as 
follows: 

Sterling 486.65 

Germany &5.20 

France  and  Latin  Union 518  ^ 

As  the  exchanges  are  above  or  below  these  points,  they  are 
said  to  be  in  our  favor  or  against  us,  and  this  is  the  only  real 
indication  of  balance  of  trade  conditions,  as  published  statistics 
are  fallacious  and  more  or  less  misleading.  As  an  instance,  let 
us  take  the  published  Treasury  statement  of  the  U.  S.  for  Decem- 
ber, 1902,  which  shows  an  excess  of  exports  over  imports  for 
the  preceding  fiscal  year  of  $670,000,000,  leaving  the  impression 
that  the  TJ.  S.  was  at  that  time  a  creditor  nation,  while  as  a  mat- 
ter of  fact  the  reverse  obtained,  as  evidenced  by  the  current 
quotations  of  foreign  exchange  which  were  all  far  above  the  re- 
Factors  spective  mint  parities.  Trade  balances  are  not  the 
Determining  only  factors  determining  the  rates  of  exchange. 
xc  ange  j^^^gg  ^^  interest,  general  economic  conditions  and 
local  causes  have  also  a  great  deal  to  do  with  fluctuations.  When 
money  rules  high  it  attracts  a  great  foreign  investment,  which 
is  made  use  of  by  so-called  finance  bills,  but  at  times  the  opposite 
condition  prevails  and  advantage  is  taken  of  higher  rates  of 
interest  abroad  by  purchase  of  time  bills  in  foreign  centers  for 
temporary  investment  purposes. 

Where  one  country  cannot  liquidate  its  debt  to  another  by 
shipping  what  it  produces,  or  returning  securities  which  were 
held  for  investment,  or  selling  its  own  securities,  recourse  must 
be  had  to  gold  shipments,  which  point  is  reached  when  exchange 
rises  sufficiently  above  the  mint  parity  to  cover  the  cost  of 
transportation,  insurance  and  other  minor  ex- 
^°^^  penses.      An  additional  factor  is  the  market  price 

Shipments  .  ,       " ,  .  ^ 

for  gold  at  point  of  destination.  In  view  of  the 
fact  that  the  mint  price  for  gold  at  all  important  centers  is  deter- 
mined by  statute,  this  last  statement  might  seem  anomalous,  but 
such  is  the  case  nevertheless.    The  quotations  for  foreign    coins 


GOLD  SHIPMENTS.  457 

varies  from  day  to  day  in  accordance  with  the  desire  of  the 
market  to  encourage  or  repel  gold  shipments.  The  mintage 
price  for  bar  gold  is  always  the  same,  but  often  a  premium  is 
paid  if  there  is  a  scarcity.  This  applies  to  England;  in  France 
~^and  Germany  other  methods  are  in  vogue  of  a  more  arbitrary 
nature,  but  none  the  less  effectual.  England  and  America  are 
free  traders  in  this  respect,  and  thus  it  always  is,  when  gold  is 
required  anywhere  in  the  world,  that  either  of  these  countries 
is  called  upon  to  supply  the  needed  metal.  As  an  instance,  in 
the  year  1902,  gold  shipments  w^ere  made  from  New  York  to 
Argentina,  although  New  York  owed  Argentina  nothing.  Amer- 
ica, however,  was  heavily  in  debt  to  Great  Britain,  and  the  latter 
country  being  called  on  for  a  remittance,  simply  turned  the 
requisition  over  to  the  United  States.  The  year  previous  a 
similar  course  was  pursued  when  France  demanded  liquidation 
of  a  debt  owing  by  England,  and  which  England  was  unwilling 
to  pay.  The  consequence  was  that  the  exchange  on  London  fell 
to  such  a  low  point  that  it  became  profitable  to  ship  gold  from 
America  to  France  wherewith  to  purchase  English  exchange, 
and  thus  was  the  burden  of  liquidating  the  French  debt  thrown 
upon  the  New  York  market,  while  at  the  rate  of  exchange  pre- 
vailing between  New  York  and  London,  a  direct  shipment  of 
gold  to  the  latter  point  would  have  been  connected  with  a 
serious  loss. 

It  is  obvious  that  in  speaking  of  exchange  operations  between 
two  countries,  the  money  of  one  country  must  be  taken  as  the 
standard  or  basis,  the  money  of  the  other  being  considered  as 
fluctuating  or  variable.    It  is  natural  and  customary  to  regard  the 

money  of  one's  own  nation  as  the  standard,  as  a 
Exchange  Tule,  with  ouc  exception,  to  which  reference  will 

be  made  later  on.  Thus  when  we  read  in  the  quo- 
tations that  exchange  on  London  is  unfavorable,  or  against  us,  we 
mean  that  it  is  at  a  premium  in  New  York — i.  e.,  a  good  bill  on 
London  is  worth  in  New  York  more  than  $4.8665  per  Pound 
Sterling.    A  typical  quotation  list  would  read  as  follows: 


458  FOREIGN  EXCHANGE. 

Sterling,  demand 4851^       60  days,  482^^  90  days,  48li^ 

German  Marks,  demand,    95^%       60  days,    94^  90  days,    94i2 
Francs,  demand 6183^       60  days,  522 J^  90  days,  5233^ 

which  means  that 

1  Pound  Sterling  is  worth  $4,853^. 

4  German  Marks  are  worth  95/^  cents,  and  (this  is  the  exception 
referred  to)  $1  is  worth  5.183^  Francs. 

In  Germany  the  quotations  would  read: 

Sterling  demand 30.39  (Marks  for  £1  Sterling). 

IT.  S.  Dollars 4.17  (Marks  for  $1.00). 

Francs 81. 10  (Marks  for  F.  100). 

In  France: 

Sterling  demand 25. 15  (Francs  for  £1  Sterling). 

U.  S.  Dollars 6. 18  (Francs  for  $1.00). 

German  Marks 123.25  (Francs  for  M.  100). 

In  the  foregoing  countries  it  will  be  noted  that  each  country 
takes  its  own  currency  as  the  standard,  with  the  single  exception 
of  the  quotation  for  French  exchange  in  America. 

In  England,  on  the  contrary,  the  foreign  countries  are  the 

variable  quantities — e.  g. : 

United  States 4.87 

Germany 20.89 

France 25.15 

American  exchange  is  sometimes  quoted  at  so  many  pence  per 
$.  e.  g.,  49  13-16d.  Eeverting  now  to  the  quotations  in  New 
York,  everything  being  equal,  and  Sterling  exchange  quoted  at 
485J,  on  the  basis  of  the  mint  parity  exchange  on  Germany 
Exchange  should  be  about  94  13-16c.  +  1-32%,  and  French 

Parity  as 

Distinguished       exchange   about    520 — 1-16%,    and    the   question 

from  Mint  °  ^  _ 

Parity  uaturally  arises,  why  this  discrepancy?    It  is  to  be 

found  in  the  different  interest  rates  prevailing  in  the  respective 

centers,  which  again  finds  its  expression  in  the  exchange  rates 

for  or  against.     Thus  in  London  the  discount  rate  is  2|%;  in 

Berlin  3J%;  in  Paris  2J% — and  as  expressed  in  exchange  rates, 

485i,  2039  and  2515.    Thus: 

2039    -4-  48525  =  23798  X  4  =  95  3-16  approximately. 
48525  -^    2515  =  5183^  approximately. 


BASIS  OF  EXCHANGE.  459 

and  in  this  way  we  arrive  at  what  is  called  the  parity  of  exchange 
as  distinguished  from  the  mint  parity — i.  e.,  prevailing  condi- 
tions are  taken  into  consideration  and  reconciled. 


CHAPTER  LIT. 

FOREIGN    EXCHANGE— Continued. 

INSTRUMENTS  OF  EXCHANGE;  QUOTATIONS;  THE  ARITHMETIC  OF 

EXCHANGE. 

A  further  factor,  and  one  of  considerable  importance  in  its 
effects  upon  trade  balances,  at  least  as  far  as  this  country  is 
Travelers'  Concerned,  is  the  personal  expenditure  of  travelers 

Letters  of  abroad.    It  is  roughly  estimated  that  this  amounts 

^'^^^'^  to  something  like  $150,000,000  per  annum.     In 

order  to  meet  the  needs  of  this  class,  a  peculiar  instrument 
has  been  called  into  being — the  Letter  of  Credit,  which 
is  addressed  to  a  certain  number  of  banking  firms,  and 
sets  forth  that  N.  M.  is  the  bearer,  and  is  entitled  to  draw 
upon  a  certain  bank,  generally  located  in  London,  for  a  specified 
amount.  Payments  as  made  in  different  localities,  are  indorsed 
on  the  Letter  of  Credit  itself,  and  when  exhausted  it  is  returned 
Circular  Note,  ^^^^  ^^®  ^^^^  draft.  A  modification  of  this  instru- 
or  Travelers'  mcut  is  fouud  in  the  Circular  Note,  or  Trav- 
elers' Check,  which  calls  for  a  specific  amount 
in  IT.  S.  Dollars,  and  is  payable  in  various  countries  at 
certain  fixed  rates.  A  further  important  instrument  in  con- 
nection with  the  Foreign  Exchange  business,  is  the  Commercial 
Letter  of  Credit,  used  principally  by  importers.  This  is  usually 
addressed  to  a  firm  by  a  bank  or  banker,  authorizing  them  to 
value  on  its  correspondent  for  a  fixed  amount,  and  engages  that 
the  drafts  drawn  thereunder  will  be  protected  if  drawn  in  ac- 
cordance with  the  terms  of  the  Letter  of  Credit.  The  terms  are, 
as  a  rule,  that  the  draft  should  be  accompanied  by  Bills  of 
Lading,  Consular  Invoices  and  Insurance  Certificates,  showing 

460 


INSTRUMENTS  OF  CREDIT.  461 

the  shipment  of  goods  purchased.  The  most  common  instru- 
jnents  used  in  foreign  transactions  are  checks  or  cheques,  demand 
drafts  and  time  drafts.  Checks  are  most  commonly  used  for  pay- 
ments on  demand.  Most  countries  have  legislated 
Drafts^  ^"**  in  favor  of  this  method  of  transferring  funds  by 

means  of  the  entire  abolition,  or  modification,  of  the 
stamp  tax — hence  demand  drafts  are  very  seldom  used.  In  con- 
tinental countries  the  circulation  of  a  check  is  limited  as  to 
time,  particularly  in  France,  and  in  order  to  avoid  the  possibility 
of  a  change  in  date  the  law  in  that  country  requires  that  all 
checks  be  dated  in  words,  thus — August  fourteenth,  1903 — in- 
stead of  Aug.  14,  1903;  and  in  Germany  a  check  must  expressly 
state  that  the  funds  transferred  are  derived  from  a  balance  due 
the  maker.  A  peculiar  method  in  vogue  of  evading  the  stamp 
tax  in  Germany  when  it  is  not  possible  to  make  the  required 
declaration  as  to  funds  due,  is  to  issue  what  is  called  a  delega- 
tion— ^i.  e.,  a  communication  addressed  to  the  beneficiary  that  a 
specified  sum  will  be  held  at  his  (the  beneficiary's)  disposal  upon 
his  application  to  certain  designated  parties.  This  instrument 
is  not  intended  for  circulation,  as  its  very  nature  deprives  it  of 
that  characteristic.  Demand  drafts  have  been  almost  entirely 
displaced  by  checks  and  delegations,  hence  are  very  rarely  used. 
They  are  subject  to  a  tax  of  J  per  mille,  (JVoo)  ^^  most  all 
European  countries,  the  same  as  time  drafts. 

Time  drafts  on  merchants,  with  shipping  documents  attached, 
enable  the  purchaser  to  dispose  of  the  goods  by  sale  before  paying 
for  same,  and  generally  contain  a  provision  where 
Time  Drafts  the  documeuts  are  held  as  security  for  the  pay- 
ment of  the  draft  that  in  the  event  of  the  drawee 
desiring  to  withdraw  the  merchandise,  he  can  do  so  upon 
payment  of  the  draft,  less  a  rebate  of  interest  at  the 
official  bank  rate  for  the  unexpired  time.  This  on  the  Con- 
tinent. In  England  such  a  draft  may  be  paid  prior  to  maturity 
under  a  rebate  of  interest  of  ^%  above  the  advertised  rate  for 


462  FOREIGN  EXCHANGE. 

short  deposits  in  the  London  Joint  Stock  Banks,  which  as  a  rule 
is  1J%  below  the  Bank  of  England  rate.  Thus  should  the  Bank 
of  England  rate  be  3%,  the  rebate  rate  would  be  2%. 

The  regular  quotations  of  foreign  exchange  cover  three  dis- 
tinct classes: 

1.  Posted  rates.  These  are  rates  arbitrarily  determined  by 
international  bankers  in  New  York  for  the  purpose  of  adjusting 
foreign  currencies  payable  in  the  United  States,  and  are  gen- 
erally somewhat  higher  than  the  actual  rates. 

2.  Actual  rates,  are  the  rates  at  which  bankers  will  sell 
their  own  drafts,  telegraphic  transfers,  etc. 

3.  Commercial  rates,  are  the  buying  rates  of  bills  of  ex- 
change, etc.,  issued  by  merchants  in  the  regular  course  of  busi- 
ness.   A  typical  quotation  list  would  read  as  follows: 

Sterling.  Tel.  Transfers.           Sight.  60  days. 

Posted  rates 487^  484 

Actual 485%                      485^  482% 

Commercial 485.40                     485  483 

Germany. 

Actual 95  11-82                 953^  94^ 

Commercial 3  days    953^  94)1 

France. 

Actual 517:^  —  1-32         518^  620%+l-16 

Commercial 3  days  519^  521>^ 

It  must  be  noted  that  the  quotations  for  French  exchange 
progress  by  f  of  1%,  and  as  the  quotations  are  for  so  many  Francs 
and  Centimes  per  dollar,  each  progression  would  be  the  equiva- 
lent of  :J  of  1%  in  our  money,  and  when  it  is  desired  to  shade  the 
rate  either  up  or  down,  this  is  done  by  quoting  the  rate  plus 
1-16%,  plus  1-32%,  or  minus  1-16  or  1-32.  It  must  be  further 
noted  that  as  the  foreign  denomination  in  this  case  is  the  variable 
quantity,  the  higher  the  quotation  the  lower  the  rate  of  ex- 
change. 

Taking  the  sight  draft  as  a  basis,  the  following  calculations 
will  demonstrate  how  the  quotations  for  telegraphic  transfers 
and  60  d/s  bills  are  arrived  at;  e.  g.  quotation  for  sight  drafts  on 
England,  485J,    Sight  drafts  or  checks  have  an  average  circula- 


RATES  OF  EXCHANGE.  463 

tion  of  ten  days,  hence  the  interest  accruing  on  the  amount 
drawn  until  presentation  for  payment  is  enjoyed  by  the  seller. 
With  telegraphic  transfers,  however,  which  are  immediately  pay- 
able, this  benefit  falls  away,  so  interest  for  ten  days  must  be 
added  to  the  quotation  of  sight  exchange  in  order  to  arrive  at 
the  price  of  a  telegraphic  transfer.    Thus: 

Sight  draft  or  check 485 .  25 

+  Int.  10  ds,  8^  approx -37^ 

485.62)^ 
Bankers'  bills,  or  where  documents  are  to  be  surren- 
dered on  acceptance. 

Demand 485.25 

Less  stamp 24 

Interest  63  ds.  2%^ 2.41  2.65 

482.60 
60  days  bills  with  documents  attached  which 
are  to  be  surrendered  on  payment  of  the  bill. 

Quotation  for  demand 485 .  25 

Less  stamp .24 

2^  int.  63  days .1-68  1.92 

"  483.38 

Telegraphic  Transfers. 

Marks.  Demand 95.25 

Interest  10  days  8^^ 08 

95.83 
Bankers'  bills,  clean  commercial  bills,  or  such  with 
documents  to  be  surrendered  on  acceptance. 

Demand 95.25 

Stamp  K^ 48 

Int.  60  days  3J^^ 5.12  .56 

94.69 
Commercial  bills  with  documents  to  be  surrendered  on  pay- 
ment under  rebate  of  interest  at  bank  rate  in  the  event  of  the 
bill  being  paid  prior  to  maturity. 

Demand 95.25 

Stamp  >^^ 48 

Int.  60  days  A%  (Bank  rate). .     6.82  .68 

94.57 
Francs. 

T/T* 

Demand 5.18.25 

Less  10  days  int.  Z% .43 

(517>^  - 1-32  =  517.66).  5.17.82 

♦Telegraphic  Transfers, 


464  FOREIGN  EXCHANGE. 

Bankers'  Bills. 

Demand 5.18.12.5 

Plus  stamp 26 

23^^  int.  60  days 1.84  2.10 

(520%  +  1-16  =  520.80).  5.20.22 

Commercial  Bills. 

Demand 5.18.12.5 

Plus  stamps 26 

Z%  int.  (bank  rate)  60  days. . .  2.60  2.86 

(Quoted  rate  521^)-  6 .  20 .  98 . 5 

In  determining  the  value  of  time  bills,  other  items  of  cost 

must  be  taken  into  consideration,  such  as  commissions  to  be 

paid  to  bankers  abroad  for  handling  the  items,  etc. 

In  discounting  bills  in  England  it  must  be  noted  that  the  3 

days  of  grace  allowed  by  law  are  taken  into  consideration  in 

calculating  the  discount  while  on  the  continent,  where  grace  is 

also   customary,   only   60   days   are   brought   into   computation. 

Days  of  grace,  as  applied  on  the  continent,  have 
Days  of  Grace      relation  ouly  to  the  notarial  act  of  protest  in  the 

event  of  non-payment — i.  e.  if  a  bill  matures  on 
Jan.  1  and  is  not  paid,  it  will  not  be  protested  until  three  work- 
ing days  thereafter.  On  the  other  hand  it  is  customary  in  Ger- 
many, when  discounting  a  batch  of  bills,  to  apply  the  bank  rate 
on  5  days  and  the  current  rate  on  the  remaining  days  the  bills 
have  to  run. 

In  the  foregoing  only  the  three  principal,  commercial  coun- 
tries have  been  considered  on  account  of  the  limited  space,  but 
the  principles  as  applied  are  the  same  in  other  countries,  barring, 
of  course,  local  usances.     The  following  calculations  based  on 

actual  transactions  will  demonstrate  many  of  the 
Illustration  principles  laid  down  in  the  foregoing  pages:     A 

batch  of  90  d/s  bills  on  London,  amounting  to 
£65,000,  was  bought  in  the  N'ew  York  market  for  remittance 
to  London  where  the  money  was  immediately  needed.  The  nat- 
ural course  would  be  to  secure  the  discount  by  cable  for  bills  to 
arrive — i.  e.,  to  go  forward  by  first  steamer.  Th-e  rate  received 
was  3^%,  showing  the  following  result; 


ARITHMETIC  OF  EXCHANGE.  465 

Amount  of  bills £65,000 

Less  3^%  discount  93  days £587.15 

Stamps 32.10  620.  5 

£64,379.15 

Simultaneously  an  offer  was  received  from  a  Berlin  bank  to 

buy  90  d/s  bills  on  London  at  2032,  or  20  Marks  32    pfennigie 

per  £,  which,  price  included  stamps,   brokerage   and  discount. 

However,  the  money  was  needed  in  London  and  not  in  Berlin,  so 

enquiry  elicited  the  fact  that  telegraphic  transfers  on  London 

could  be  bought  at  2048|  thus: 

£65,000®  2032  =      M.  1,320,080 

@  2048^  = £64,433.10 

The  disposal  of  the  exchange  in  Berlin  being  the  more  profit- 
able by  £53.15,  it  was  sent  there.  Another  case,  where  the  opera- 
tion is  reversed — 

M.  1,000,000  90  days  on  Berlin  sold  in  London 

@  2057 £48,615 .  19 

Exchange  there  against  sold  in  New  York 

@485J^ $235,908.88 

If  remitted  to  Berlin  for  discount  and  exchange  sold  there- 
against  in  New  York,  the  result  would  have  been  as  follows: 

90  days  bills  Berlin M.  1,000,000 

Less  3^%  disc.  90  days,  M.  8125.00 

Stamps 500.         8,625 

M.  991,375 

©953^4-1-64      $235,798.19 

By  remitting  Berlin  exchange  to  London  a  saving  of  $110.69 
=J  Voo   (per  mille)  was  effected. 

London  is  the  only  European  open  market  for  gold,  hence 

the  fluctuation  of  exchange  on  London  in  New  York  is  limited 

to  the  actual  cost  of  shipment  of  bullion  and  the  expense  for 

interest  while  in  transit,  approximating  f  of  1  per 

Fluctuations         ^qj^^   above  or  below  the  mint  parity — whereas  in 

m  Exchange  ^  •' 

the  case  of  Berlin  or  Paris  exchange  the  fluctua- 
tions have  a  wider  scope,  dependent  upon  the  premium  charged 
or  allowed  for  gold,  and  have  been  known  to  approach  a  variation 
of  pretty  nearly  one  per  cent,  above  or  below  the  mint  parity. 


466  FOREIGN  EXCHANGE. 

Foremost  among  the  exchange  centers  of  the  world  stands 
London,  with  the  Bank  of  England,  surrounded  by  a  most  won- 
derful group  of  Joint  Stock  and  private  Banks.  The  other 
European  centers  are  Paris  with  the  Bank  of  France,  and  Berlin 
with  the  Imperial  Bank.  These  three  institutions  stand  guard 
over  the  financial  destinies  of  the  world,  and  their 
cenfere^'  Weekly  statements  are  eagerly  scanned  by  finan- 

ciers as  the  true  trade  barometer.  So  sensitive, 
indeed  is  the  world  of  finance  that  when  occasionally  a  meeting 
of  the  Board  of  Directors  of  the  Bank  of  England  is  extended  a 
few  minutes  beyond  the  usual  time  this  fact  immediately  be- 
comes a  cause  for  apprehension,  and  it  is  said  that  the  discussion 
of  an  irrelative  subject  among  the  directors  after  the  close  of  a 
board  meeting  at  a  critical  period  almost  caused  a  panic  on  the 
Stock  Exchange.  These  centers  are  engaged  in  a  constant 
warfare,  one  against  the  other,  and  while  the  hostilities  are  of  a 
peaceable  nature,  the  methods  employed  are  quite  drastic  at 
times;  still,  when  a  common  danger  threatens,  these  three 
great  institutions  are  ever  ready  to  extend  to  each  other  a 
helping  hand. 

Owing  to  the  peculiar  features  of  the  banking  laws  of  the 
United  States,  conditions  in  this  country  are  somewhat  different 
and  not  so  easily  regulated  in  times  of  stress  as  they  are  abroad. 
Our  clearing  houses  act  as  a  unit  and  are  the  determining 
factors  when  decisive  steps  have  to  be  taken  for  the  protection 
of  the  commercial  community. 

Gold,  as  has  clearly  been  demonstrated,  performs  the  func- 
tion of  settling  international  trade  balances  best,  and  upon  refer- 
ence to  the  financial  papers  of  the  day  it  will  be  seen  that  there 
is  constantly  a  movement  of  the  metal — flowing 
of'Goid'^^^°'^  regularly  through  the  arteries  of  trade,  subject 
to  natural  laws  as  unalterable  as  those  in  the 
material  world,  and  after  having  performed  its  duties  in  revivi- 
fying commerce  returning  to  the  exchange  centers  of  the  world. 


EXCHANGE  CENTHESS.  467 

only  to  be  ready  at  a  moment's  notice  to  again  go  forth  on  its 
mission  to  benefit  the  human  race,  by  developing  the  resources 
of  distant  parts  of  the  world, — perhaps  the  wilds  of  Canada  or 
the  rice  fields  of  India,  or  to  supply  the  sinews  of  great  enter- 
prises such  as  transcontinental  railroad  lines. 


INDEX. 


PAGE. 

Accommodation  Paper  278 

Agriculture  138,  400 

Alaric     29 

Alaslja,  Purchase  of 135 

Alexandria     15 

America,   Discovery  of 39 

American   Colonies   106 

American  Sliips,  Capture  of 116 

Amsterdam,   a   Commercial   Cen- 
tre         53 

Amsterdam,  a  Financial  Center.  169 

Annuities    383 

Anti-Bubble  Act   214 

Arbitrage    455 

Assessment  Insurance 383 

Assets,  Shrinkage  of 335 

Banlc  Clearing  House   262 

History  of,   263;   Functions  of, 
266. 
Bank  Discount,  Desirable  Paper 

for   274 

Bank  Scandals  227 

Bank   War   229 

Bank  of  Venice    34,  168 

Banks,    Private    245,246 

Savings,  246,  247;  State.  221, 
244,  245;  Branches  of,  210. 

Banking,  Colonial   21S 

Banking     Feature     of     Foreign 

Commerce     449 

Bank  of  England 95,  179 

Monopoly  of.  180;  Divided  Into 
Two  Departments,  182;  Notes. 
183;  Issue  Department,  185; 
Banking  Department,  187;  Re- 
serve, 188;  Keeper  of  Reserves, 
190;  Rate  of  Discount,  192;  A 
Private  Corporation,  193;  Man- 
agement,   194. 

Bank  of  North  America 215,  216 

Bank  of  the  United  States..  109,  120 
First,  217,  218;  Renewal  of  the 
Charter,  221;   Second,  223,  224, 
225;     Jackson's     Hostility     to, 
228;  Second,  Failure  of,  230. 

Barbarian   Invasion    28 

Barter    148 

Bear  Market,  A 394 

Berlin  Decree  117 

Bills  of  Credit  215 

Bills,  Documentary   277 

469 


PAGE. 

Bimetallism 166,  167 

Black  Friday 184 

Blount,    John    96 

Board  of  Directors  293 

Board  of  Underwriters 362 

Bonds     319 

Government,  319;  Refunding, 
320;  Coupon,  321;  Municipal, 
321;  Registered,  321;  State,  321; 
Income,  322;  of  Private  Cor- 
porations, 322;  Security  for, 
323;  Debentures,  323;  Collat- 
eral Trust,  323;  Foreclosure 
under,  325;  State,  329;  Rail- 
road, 332. 

Bond   Issue,    Floating  of 323 

Bonded    Warehouses    415 

Classes  of,   416. 
Borrowing  and  Lending  Money..  271 

Borrowing,   Limit  of   273 

Bounty    440 

Branch  Banks 175 

Britain,    Under    Roman    Rule    ..     82 

Bruges,  a  Market  65 

Bucket  Shops  414 

Bulls  and  Bears 393 

Bulls  and  Bears  of  the  Produce 

Exchange    409 

Bull  Market,   A    394 

Buying  and  Selling  Stocks 396 

By-Laws   294 

Carriers   of   Produce    402 

Carthaginian  Commerce  19 

Call  Loans   275,  399 

Cape  Route,  Discovery  of 46 

Cash  Grain    407 

Canadian    Banking   System.  .206,  231 
Inspection,   207. 

Centennial  Exposition,  1876 143 

Certificates,  Gold  and  Sliver 243 

Change  of  Commercial  Centers..     45 

Charlemagne   31 

Checks  and  Drafts  263,  461 

Circular  Note  460 

Civil  War,  The 131 

Clay,   Henry    221 

Clearinghouse   262 

Certificates,  266;  Matter  for 
Clearing,  268. 

Clipper   Ships    122 

Coasting  Trade  of  United  States  446 


470 


INDEX. 


,.    „  PAGE. 

Colbert,   Commercial  Policy 69 

Cold   Storage  Center   419 

Cold  Storage  Warehouses   418 

Commerce,    American    439 

During  Napoleonic  Wars,  100; 
Revival  of,  After  the  Adoption 
of  the  Constitution,  109. 

Commercial  Agencies 340 

Commercial    Credits    336 

Commission  Merchant,  The 403 

Comptroller  of  the  Currency 235 

Confederation,  American   108 

Coinage    151,  161 

Coin,   Subsidiary    156 

Collection  Laws 342 

Cotton  Gin,  The   112 

Cotton  Industries   133 

Co-Insurance   363 

Consular  Invoices   447 

Consular  OflScers,  Duties  of 447 

Consular  Service  446 

Continental  Money  108 

Cooley,  Thomas  M 312 

Corner   411 

Corn  Laws 100 

Corporations    282 

Close,  282;  Formation  of,  283; 
Private,  282;  Officers  of,  294; 
To  Control  By-Products,  301; 
Consolidation  of,  308;  Insol- 
vency of,  314;  Credit  of,  343. 

Corporate   Manipulations   302 

Corporate  Merger,   Illegal   303 

Corporate  Seal   298 

Corporate  Signature 298 

Countervailing  Duty    440 

Covering   410 

Credit   Associations    342 

Credit,  Limit  of 336 

Currency,    Elasticity   of    185,  209 

Days  of  Grace  464 

Debentures    323 

Decay  of  Commerce    30 

Delivery  Day    410 

Deposits,    Removal  of  by   Presi- 
dent Jackson   229 

Differential  Rates 430 

Dividends  290 

Stock,  290;  Fictitious,  290;  Il- 
legal, 291. 

Dominion    Notes    212 

Drafts,    Time    461 

Dutch,   Character    53 

In  Possession  of  Carrying 
Trade,  53;  Shipbuilders  and 
Navigators,  53;  Commerce  in 
the  East,  54;  East  India  Com- 
pany, 54;  Colonies  in  the  West, 
54. 

Dutch  Colonial  Policy    55 

Duty,  Countervailing 440 

East  India  Company  of  England 

89,   90,  91 

Edict  of  Nantes,  Revocation  of. .  71 

Egyptian  Commerce 14 

Eighty  Per  Cent  Clause 363 

Embargo  Act   117 


PAGE. " 

Endless  Chain,  Operation  of  ....  242 
England,   Ancient  Commerce  of.     81 
A    Manufacturing    Nation,    93; 
Change     from     Protection     to 
Free   Trade,   102. 

England's  Colonial  Policy 97,  107 

Present  Commercial  Condition, 
105. 

English  Banking  System   95 

Growth  of  Colonial  Posses- 
sions, 101;  Eastern  Posses- 
sions, 103;  Carrying  Trade 
Prior  to  15th  Centurv,  80;  In* 
South  Africa,  104;  Prohibition 
of  the  Exportation  of  Machin- 
ery,  Tools,  etc.,  107. 

English  Manufactures 94 

English  Navigation  Acts   93 

Equal  Mileage  Rates   435 

Equity  of  Redemption    352 

Erie  Canal   120 

Exchange,  Fluctuations  in    465 

Exchange  Centers 466 

Exchange  Parity  458 

Exports,    Colonial    106 

Exports   and    Imports    136,  137 

Exposition  in  New  York 129 

Factory   System,   The   98 

Fairs  of  Middle  Ages 83,     84 

Fall  of  Rome   29 

Fast  Freight   Lines   437 

Feudal  System 31,  84,  153 

Fire  Insurance,  Origin  of 354 

Lloyds,  355;  Mutual  Com- 
panies, 355;  Stock  Companies, 
356;  Rates.  357,  360;  Basis 
Rate,  358;  Floating,  365; 
Blanket  Policy,  365;  Owner- 
ship, 366;  Loss  Payable  Clause, 
368. 

Flanders,  Commerce  of 64 

Manufactures  of,  64;  Decline 
of,   65. 

Florence    41 

Florence.  Bankers  of  42,     43 

Fluctuations  in  Exchange 465 

Foreclosure     317,  3.52 

Foreclosure,    Fraudulent    318 

Foreign  Commerce 438 

Banking  Feature  of,  449. 

Foreign    Exchange    450,  452 

French  Colonial  Possessions 67 

French  Colonial  Trade  79 

French  Commerce,  Beginning  of.     65 
Recent,  78, 

France,  Reign  of  Louis  XIV 66 

Possessions  of,  in  America,  68; 
Colbert  as  Minister,  66;  Con- 
flict with  England  in  America, 
69;  Condition  under  Louis  XV, 
72;  Bank  of,  173,  177;  Func- 
tions of  the  Bank,  174. 

French    Expositions    78,     80 

French   East   India   Company    . .     66 

French   Revolution   112 

Causes  of,  74. 


INDEX. 


ill 


PAOE. 

Free  Banking 231 

Free   Warehouses    418 

Freight,  Classification  of 432 

Object  of  Classification,  433; 
What  the  Traffic  Will  Bear, 
434;  Cost  of  Service,  434;  Dis- 
criminations, 433;  Long  and 
Short  Haul,  436. 
Freight  Rates,  How  Determined.  434 
Competition,  435;  Equal  Mile- 
age, 435. 

Freight    Traffic    428 

Futures     407 

Trading  in,  409. 
Genoa,  Conflict  with  Venice.. 36,     37 
Rival  of  Venice,  37,   38;   Com- 
merce of,  37. 

Genoese   Industries    38 

Finance  and   Laws,   38. 

German  Banking  196 

German    Commerce    59 

Revival  of.  60. 
German,   Development   of  Home 

Industries    61 

German      Imperial     Treasury 

Notes    200 

German  Money  System,  Elastic- 
ity of  the  Currency   198 

Germany,  Present  Commerce  of.     62 
Practical  Education  in,  63. 

Glass,  Venetian   34 

Gold,  Discovery  of  in  California.  128 
Ebb     and     Flow,     466;     Legal 
Value  of,  452. 

Gold  Shipments 456 

Government    Bonds    328 

Grain  Inspection   412 

Greek    Commerce    17 

Gresham's    Law    159 

Hansa,  The 56 

Hansa    Congress    58 

Hanseatic  League  56 

Effect  of,  58;  Object  of,  83. 

Hamilton,  Alexander 216 

Report  of,  217. 
Hamilton's  Financial   System   ..  109 

Hawaiian  Islands   144 

Henry   VIII    87,     88 

Holland,  Lands  Below  Sea  Level     53 
Home  Industries,  Prior  to  1812. .  115 

Immigration    113 

Implied  Powers,  Doctrine  of,  110,  218 

Import  and  Export  Duties 439 

Incomes,  Purchase  of 387 

Independent   Treasury    Act    254 

India,  Acquisition  of  by  England    92 

Industrials,   Financing  of   309 

Inspection  of  Grain  412 

Insurance,   Fire   354 

Insurance,  in  Cold  Storage  Ware- 
houses      422 

Industrial  Insurance   377 

Interchangeable   Values    453 

International   Law    445 

International     I  n  d  e  b  t  e  dness. 
Liquidation  of 454 


PAGE. 

International   Banking   454 

Interstate  Commerce  Law 478 

Inventions  in  18th  Century 99 

Inventions    130 

Invincible   Armada    51,   87,     88 

Invoices,   Consular   447 

Iron  and  Steel   134 

Jacquard  Loom 77 

Jews,  Banishment  of 85 

Expulsion  by  Spain,  51. 

Kiln  Dried  Grain    413 

Land  Bank,  John  Law's 72 

In  Boston,  213;  of  1741,  214. 

Land  Tenures  !n  France 76 

In  the  United  States,  141. 

Law,    International    445 

Law,   John    72,     73 

Law  of  Probabilities  370 

Life  Insurance  370 

History  of,  371;  Two  Methods, 
371;  Stock  and  Mutual  Com- 
panies, 372;  Insurable  Interest, 
372;  Policies,  373;  Limited  Life 
Policies,  374;  Endowment  Pol- 
icies, 374;  Joint  Life,  376;  Pre- 
mium Loan,  376;  Payment  of 
Premiums,  378;  Dividends,  378; 
Incontestability,  380;  Non-For- 
feiture, 380;  Loans,  381;  As  an 
Investment,  381;  Surrender 
Value  of  Policies,  382;  An- 
nuities,  383. 

Light  Houses,  Buoys 443 

Lisbon,  a  Commercial  Center  ...     48 
Port  of.  Closed,  52. 

Listing  Securities   395 

Loans,  on   Collateral  275 

Speculative,  276;  on  Real  Es- 
tate, 280. 

London,  a  Financial  Center 178 

The  World's  Clearinghouse, 
178. 

London  Stock  Exchange 385 

Long     394 

Longs  and  Shorts  410 

Long  and  Short  Haul  436 

Loss   Claims    368 

Loss  Payable  Clause  368 

Louis       XIV,       Persecution       of 

Huguenots    70 

Louisiana,  Purchase  of 113,  114 

Manufacturing      Bonded      Ware- 
houses      417 

Margins     404 

Buying  on,  389,  397. 

Medlcis,    The    42 

Medium  of  Exchange 149 

Merchant   Marine    123 

Mercantile   Agencies    341 

Reports  of,  342. 

Merger,  Illegal   303 

Mexican   Cession   127 

McKinley  Bill,  The  139 

Milan    43 

Mint,  Establishment  of  Ill 

Mint  Parity 453 


472 


INDEX. 


PAGE. 

Mississippi  Company,  The 73 

Money    147 

Essentials  of,  151;  An  Instru- 
ment of  Commerce,  152;  A 
Medium  of  Excliange,  153;  A 
Measure  of  Value,  153;  A 
Standard  of  Value,  154;  A 
Store  of  Value,  156;  Paper, 
Kinds  of,  158;  Representative, 
160;  Volume  of,  162,  176;  Sub- 
stitutes for,  163. 

Money   Market   272 

Monometallism   165 

Moors,    Expulsion   of    50 

Mortgages   333,  334 

Recording    of,    353. 

Mortgages,  Farm  . : 334 

Mortgage  Securities   331 

Mortgage  and  Trust  Deeds 351 

Morris,   Robert  215 

Napoleon's  Policy   75 

Napoleanic  V^ars,   Effect  of 116 

Napoleon  III 77 

National  Banking  Act  257 

National   Banking  System    ..233,  234 

National   Debt    124 

National  Reserve  241 

Navigation   Acts    102 

Navigation   and   Tonnage   Acts..  441 
New  York  Stock  Exchange   .385,  386 

Ninety-Nine  Year  Leases  349 

Norman   Conquest    84,     85 

Note    Brokers     278 

Notes,  United  States   242 

Notes,     Convertible    and    Incon- 
vertible      160 

Circulating,  175;  Redemption 
of,  176. 

Order  in  Council   117 

Over-Certification  of  Checks 398 

Pacific    Railroad    135 

Packing  Goods 448 

Panic    of    1837    125,231 

Of  1857,  129,  130;  of  1819,  226; 
of  1873,  138;  of  1893,  268. 

Paris  Bourse  385 

Partnership,    Credit  of 343 

Peel,  Sir  Robert   181 

Petroleum    134,  135 

Philippine  Islands 145 

Phoenicians  as  Navigators   145 

Piracies  83 

Pisa     40,     41 

Pooling     427,  428 

Portuguese  Trade   47 

Postal   Aid   Law    442 

Postal  System,  Origin  of 94 

Precious  Metals,  as  Money 50 

Preferred    Stock    286 

Creation  of.  287. 

Private  Banks  245,  246 

Private    Warehouses    417 

Produce  Exchange,  The   400 

Produce   Exchange   Centers    ....  401 
Produce  Exchange,  Benefits  of  .  406 
Organization   of,   402. 


PAGE. 
Prohibition    of    Colonial    Manu- 
factures     107 

Promotion    310 

Protective  Duties 121,  122 

Punic    Wars    20,     21 

Purchase   and   Sale  of   Real    Es- 
tate    345 

Puts,  Calls  and  Spreads 394 

Queen    Elizabeth    87,     88 

Prosperity,  89;  Monopolies  un- 
der, 89. 

Railroading    423 

Railroads     126,  140 

Ownership,  425;  Capitalization, 
425;  Efficiency,  426;  Consolida- 
tion, 426;  Pooling,  427,  428. 

Railway,  Associations  427 

Rates  of  Exchange    456 

Ratio    165 

Real  Estate,  Titles  345 

Surveys,  346;  Subdivisions,  347; 
Values,  347. 

Real  Estate  Contract    349 

Receiver    313 

Duties  of,  313;  Friendly,  314. 

Receiverships    315 

Receivers  of  Produce    402 

Reciprocity    139,   140,  144 

Recording  Deeds  and  Mortgages.  353 

Refrigeration     420 

Regulator  of  the  Currency.  .223,  227 

Reichsbank     197 

Controls  other  Banks,  200. 
Reorganization   of   Corporations.  .326 
Committee,    316;    Methods    of, 
316. 

Reserve   238 

Revolutions,  Period  of 98 

Rialto,   of  Venice    35 

Roman  Industries   22 

Roman    Supremacy    22 

Roads,  23;  Commerce,  24; 
Slavery,  25,  26. 

Russian  Money  System 201 

Russian  Bank,   Branches  of 202 

Russian  Loans    203 

Russia,  Imperial  Bank  of 201 

Safety     Fund     System    of    New 

York     230,  231 

Savings   Banks    246,  247 

Mutual.  248;  Private,  249. 

Saxons,  Normans  and  Danes 82 

Scotland,    Banking   System    of    .  .204 
Elasticity   of   Its    System,   204; 
Cash     Credit     Accounts,     205; 
Branch  Banks,  205. 

Securities    328 

Local,  330;  Mortgage,  331; 
Speculation,  384. 

Securities,  Companies   303 

Second  United  States  Bank 124 

Sereno  S.  Pratt   387 

Shipbuilding    106 

Ships,    Registration    of    443,444 

Entrance  of,  450;  Clearance  of, 
451. 


INDEX. 


473 


PAGE. 

Ship  Captains,  Discretion  of 443 

Shippers  of  Produce    402 

Short    393 

Signed  Statements   341 

Silver,  Demonetization  of 157 

Sinking  Fund   292 

Slavery    121 

South  Sea  Bubble  96 

Spain,  Decay  of  Commerce 51 

Treatment  of  Dutch,  52;  Treat- 
ment of  Cuba,  52. 

Spanish  Colonial  Policy   50 

Spanish  Commerce   49 

Specie  Payments,  Suspension  of.  222 

Resumption  of,  137. 
Speculation,  In  Securities   388 

Is   it  a   Benefit,   388. 

State  Banks  129,  244,  245 

State   Bonds    329 

Steam  Engine  102 

Steamboat,    First    114 

Stock    285 

Watered,  288;  Fluctuations  in, 

391;    Preferred,   286;   Treasury, 

287. 

Stock    Broker   393 

Stock  Exchange,  The   384 

A   Place  for  Investments,   386; 

A  Market  for  Securities,  386. 

Stock   Gambling 390 

Stocks    333 

Storage  and  Warehousing 415 

Storekeeper    416 

Subsidy    441,  442 

English,      442;      French,      442; 

United  States,  442. 

Subsidiary  Corporations  300 

Sub-Treasury  System 241 

Sub-Treasuries     258,  260 

Suffolk  Bank  System 230 

Surplus    292 

Tariff  and  Tonnage  Acts Ill 

Telegraph    126,  127 

Tickers    399 

Tonnage  Laws   122 

Trade  Follows  the  Flag 443 


„  PAGE. 

Trade  Marks 448 

Trade  News,  Prices  Based  On..  405 

Trafllc    Associations    427 

Tramp  Steamers  442 

Transportation  by   Rail   423 

Development  of,  424. 

Travelers'    Check    460 

Travelers'  Letters  of  Credit 460 

Treaties,  Kinds  of   445 

Treasury   Stock    287 

Treasury  Notes   255 

Trust    305 

How  Formed,  307;  Illegal,  308; 

Powers  of,   307. 
Trust    Companies    249 

Functions   of,    250. 

Time  Drafts   461 

Underwriting    310 

United     States,     Present     Com- 
merce     145,  146 

United   States   Bank,    First.. 217,  218 
Branches    of,    219;    Renewal    of 

Charter  of,  221. 
United  States  Treasury 252 

Establishment   of,   253. 

Usury,  A  Crime  38 

Values,  Interchangeable 453 

Venice,  Sources  of  Wealth   33 

Decline  of,   36. 

Venetian  Commerce  33 

Venetian  Manufactures 33 

Venetians,  Originators  of  Science 

of  Double  Entry  Book-Keeping    35 

Viscontl  of  Milan   45 

Voting  Trust 303 

Wages,  Rate  of 144 

Warehouse    Receipts   277 

As   Security,   421. 

Watered  Stock  288 

Wild   Cat  Banks   231,  232 

WIsselbank     171,  173 

Wool,    English    85 

World's    Columbian    Exposition, 

1893  143 

Zollyerein,  The 61 


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THIS  BOOK  IS  DUE  ON  THE  LAST  DATE 
STAMPED  BELOW 

AN  INITIAL  FINE  OF  25  CENTS 

WILL  BE  ASSESSED   FOR   FAILURE  TO   RETURN 
THIS   BOOK  ON   THE  DATE  DUE.   THE  PENALTY 
WILL  INCREASE  TO  50  CENTS  ON  THE  FOURTH 
DAY    AND    TO     $1.00    ON     THE    SEVENTH     DAY 
OVERDUE. 

mi  1**  1^^^ 

^fHU  1¥  1935 

^*5r  j-T  ^^^ 

OCT  16«39 

JAN    20  194R 

LD  21-100m-7,'33 

3r 


VC  0573b 


"^  I  -b"-! 


